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The minutes from the May Federal Open Market Committee (FOMC) meeting delivered a harsh reality check to investors, countering the dovish signals earlier conveyed by Fed Chair Jerome Powell during the May press conference.
Three key messages reignited investor fears about the increasing likelihood of a prolonged period of high interest rates.
First, participants at the meeting assessed that it would take longer than previously anticipated to gain greater confidence in inflation moving sustainably to 2%.
Second, many participants discussed whether the current policy is effectively restrictive.
Third, “various participants” expressed a willingness to tighten policy further should risks to the outlook materialize, making such action appropriate.
“Higher for longer is the official mantra,” stated Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
The expert highlighted that the Fed has officially recognized that inflation is proving more persistent than thought. Although they had hoped to cut rates, they will not be able to do so in the near future.
“Given that rate cuts are off the table, bears would normally get excited, but because Chair [Jerome] Powell officially took rate hikes off the table, the market is going to fluctuate based on other factors,” he stated.
According to Zaccarelli, the Fed has chosen not to intervene significantly, leaving Nvidia Corp.‘s earnings report to dictate the market’s direction going forward.
“Higher for longer is here to stay” The Kobeissi Letter wrote in a post on social media X.
Alex McGrath, chief investment Officer for NorthEnd Private Wealth, noted that the Fed minutes delivered a “hawkish surprise,” sending yields up and equities down. Investors will need to wait another month for any news on rate cuts, but the willingness of some participants to further restrict policy was unexpected.
He highlighted that growth-based macro factors have weakened while inflation has increased since the last FOMC meeting. McGrath warned that stagflationary conditions could be a major issue for the Fed, which previously deemed inflation transitory, and could pose political challenges for President Joe Biden.
The Fed now faces a tough dilemma; if economic data worsens and inflation stays high, rate “cuts coming to the rescue isn't a solution and it's the only tool they have in the bag at this point,” McGrath said.
“Higher for longer unless labor market weakens,” Quincy Krosby, chief global strategist for LPL Financial, commented on the Fed minutes.
She noted that despite Powell’s recent dovish comments hinting at a potential rate easing, Fed speakers have emphasized the need for a series of more favorable inflation-related data before easing policy.
Wall Street closed Wednesday in the red, ahead of Nvidia’s earnings report. The SPDR S&P 500 ETF Trust (NYSE:SPY) eased 0.4%, the SPDR Dow Jones Industrial Average (NYSE:DIA) fell 0.6%, and the Nasdaq 100, as tracked by the Invesco QQQ Trust (NASDAQ:QQQ), closed 0.3% lower.
The dollar gained ground, with the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP) rising 0.3%.
Treasury yields closed the session with an uptick. The rate-sensitive 2-year Treasury yields inched 4 basis points up to 4.88%.
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Image generated using artificial intelligence via Midjourney.
