Fed Skips Increase For Now

Fed Skips Increase For Now

June was a good month for stock investors. Unlike earlier in the year when a few stocks drove nearly all the gains, June’s rally was broad. Nearly every category, sector, and style of stock participated in the gains. U.S. small-cap stocks, for example, roared back to life and surged 8%. U.S. and foreign markets both increased by several percentage points. Fixed income investors had a quieter month. The U.S. bond market trended sideways during June, ultimately ending the month about where it began.

June’s most anticipated financial event was the Federal Reserve’s FOMC meeting. At that meeting, the Fed decided to leave their policy rate unchanged, marking the first time since March of 2022 that a meeting occurred without a rate increase. Careful to stem unwarranted exuberance, Fed officials also indicated that rates would probably be raised again this year. Financial markets had persistently priced in rate cuts for the second half of 2023. Now they predict a single quarter point hike in July and then a pause for the rest of the year, although some Fed comments suggest two more hikes are possible.

What is the justification for further rate hikes? Inflation. To be sure, inflation has come down. As of the last reading, consumer prices are now growing at 4%, roughly half the peak rate from last summer. Still, the current rate of inflation is double the Fed’s 2% target. Additionally, the core version of the Consumer Price Index, which excludes volatile food and energy, is still growing at 5.3%. Chairman Powell recently noted that, “inflation pressures continue to run high,” and also stated, “labor demand still substantially exceeds the supply of available workers.”

While labor demand has pushed up inflation, it’s also part of what has kept the domestic economy growing. While the first official GDP report won’t be released until the end of July, a recent survey of economists shows an average forecast of just under 1% GDP growth. An econometric model run by the Atlanta Fed predicts second quarter growth of 1.8%. International economies, on the other hand, present a more mixed picture. The Eurozone, for example, fell into a mild technical recession, with weakness in Germany and Ireland offsetting small growth in France and Spain. The Chinese economy expanded by a robust 5%, but that was less than expected. Japan’s economy has moved out of a recession. The World Bank and The Organization for Economic Cooperation and Development (OECD) are still predicting the world’s economy will expand by about 2 to 2.5% during the 2023 calendar year.

With the first half of the year now behind us, things look brighter for investors compared to a year ago. Stocks are more reasonably priced than they were during the COVID 19 rally. Additionally, with bonds providing meaningful income, investors have promising options.

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