Mohit Oberoi
US stock markets were weak last week and closed with losses. Next week, the Fed would hold its last meeting of the year where economists expect it to raise rates by another 50 basis points.
Fed policy has been a key driver of US stock markets this year as the US central bank has embarked on the most aggressive monetary policy tightening in decades. It has raised rates in every meeting since March, including four consecutive hikes of 75 basis points. Fed fund rates now stand at 3.75%-4.0%.
Looking at some of the recent economic data that could influence the Fed’s decision, the November PPI (producer price index) was 7.4% which was ahead of the 7.2% that economists were expecting.
The November jobs report was strong too. The November nonfarm payrolls increased by 263,000 which was well ahead of the 200,000 that economists were expecting. The Labor Bureau also upwardly revised the October nonfarm payrolls to 284,000.
Also, the wage growth was 0.6% in November on a monthly basis which was twice what economists were expecting. Speaking at the Brookings Institution recently, Fed chair Jerome Powell raised concerns over strong wage growth.
In October, the CPI inflation came in at 7.7% which was lower than what analysts were expecting. Higher inflation has taken a toll on US stocks, especially the growth names. However, there is a list of investments that can do well in inflation.
Watch Out for November CPI Release
The next key economic indicator that markets would watch is the November CPI which is scheduled for Tuesday. It would of course be followed by the Fed rate hike decision the next day.
To be sure, Fed chair Jerome Powell has dropped ample hints that the US central bank is now looking to go slow on rate hikes.
At the Brookings Institution speech, Powell talked about the possibility of slowing the pace of hikes and said “The time for moderating the pace of rate increases may come as soon as the December meeting.”
Fed Might Slow Down the Pace of Rate Hikes at December Meeting
Powell added, “My colleagues and I do not want to overtighten because…cutting rates is not something we want to do soon.”
The November Fed minutes were also somewhat dovish and said, “A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.”
They added, “A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability.”
All Eyes on Fed Now: Would It be a Santa Claus Rally?
The next week would be quite crucial for investors as they fancy the chances of a Santa Claus Rally. While markets are pricing in a 50-basis point rate hike, investors would watch Powell’s comments on the pace of future rate hikes.
Wharton professor Jeremy Siegel predicts that the Fed would pause its rate hikes after a 50-basis point rate hike in December. He also said that markets would not retest their 2022 lows and can deliver 30% returns over the next two years. There is a guide on how to buy stocks with a regulated broker.
The Fed literally holds the key for a possible Santa Claus Rally this year. Meanwhile, along with the rate hikes, markets are also worried about a recession. Elon Musk said that the recession would be “greatly amplified” if the Fed raises rates again
On multiple occasions, Powell has said that the rate hikes might lead to recession. He however emphasized that the Fed is not trying to force one. While recession impacts most sectors of the economy, some of the investments are largely recession-proof.
A Reuters poll showed that economists expect Fed to raise rates by 50 basis points in 2023 as well. Economists have put a 60% odd of a recession in 2023. The Fed is facing among the toughest choices in years as it tries to tame US inflation while also preventing a hard landing for the world’s largest economy.
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This article was written for Business 2 Community by Mohit Oberoi.
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