Minutes from the Federal Reserve’s May 4 meeting shows central bank officials in agreement on the ned for 50-basis-point interest rate increases at the June and July meetings. And then, the minutes say, the Fed would respond to developments in the economy either with more interest rate increases or a pause to let the economy recover. That’s essentially in line with market sentiment–although Wall Street may be more convinced of the need for a September interest rate increase. That agreement was reassuring to the stock market today.
Back on April 11 when I sold Wells Fargo (WFC) and the Invesco KBW Bank ETF (KBWB) out of portfolios to reduce my exposure to a slowing economy caused by the Federal Reserve interest rate increases, I kept my position in U.S. Bancorp (USB) because I wanted to collect the dividend due to be paid out on April 15 (and because I thought super-regional U.S. Bancorp, as one of the best managed banks in the country, was less exposed to the downward trend in the sector.) Well, as of May 19, I’ve certainly collected my quarterly dividend (the stock current yields 3.75%) and the downward trend in financial stocks has picked up speed with the Fed announcing (well, as close to “announcing” as the Fed ever does) interest rate increases for the June, July and September meetings of the central bank, so I’ll be selling U.S. Bancorp out of my Jubak Picks Portfolio tomorrow May 20.
Initial claims for unemployment tick upward, but backward looking numbers don’t capture layoff trend
Initial claims for unemployment moved up to 218,000 last week . That was the highest level since the week that ended on January 22. And an increase of 21,000 from the revised total of 197,000 the week before. But even though the official report is only a week old, it’s not capturing what seems to be an upward trend in the announcement of layoffs.
Fed’s Bullard says two 50 basis point increases and a move to 3.5% by end of year are a “good benchmark”
But did he have to say it? The financial market would prefer not to think about inflation all the time. The markets are indeed pretty good at ignoring the inconvenient. But this morning Federal Reserve Bank of St. Louis President James Bullard said out loud what Wall Street knows in its heart but doesn’t want to think about. “Inflation is broader and more persistent than many have thought and the Fed will have to act in order to keep inflation under control and we’ve got a plan in place,” Bullard told Yahoo Finance Wednesday.
My one-hundredth-and-thirtieth YouTube video “Market gives Fed a razzberry” went up today. Yesterday, the Fed announced that it would raise rates by 50 basis points but that it was not looking to raise by 75 at the June or July meetings. In response, the market had a huge rally, especially in tech stocks, as it had b been widely assumed that those meetings would see the larger 75 basis-point increase. All that has changed today, when upon second thought the market no longer likes this news, with the S&P 500 and NASDAQ Composite giving back all the gains they made yesterday plus a little more. I look at a few specific stocks, like Amazon and Advanced Micro Devices, and talk about why I think the selloff in tech stocks is going to continue.
Today the Federal Reserve’s Open Market Committee announced that the central bank would raise its benchmark interest rate by 50 basis points. Stocks rallied strongly after Federal Reserve chair seemed to take off the table the 75 basis point increase in June and July that financial markets were convinced was in the cards.
Economists surveyed by Bloomberg project the Federal Reserve will hike its benchmark short-term interest rate by 50 basis points on Wednesday in an effort to damp inflation. And bond traders have just decided that the U.S.central bank will raise rates by 75 basis points at its June 15 meeting. The CME Fed Watch Tool, which uses prices in the Fed Funds Futures market to calculate odds of a fed move, puts the odds of a 50 basis point increase from the current 0.25% to 0.50% to 0.50 to 0.75% at 99.8%. That tool puts the odds of a 75 basis point increase air the June 15 meeting at 87%. That’s up from odds for just 18% on April 1. Bond prices are down and bond yields are up today.
Data, data everywhere in the next two days. From inflation to GDP. To begin with the Bureau of Economic Analysis is scheduled to report first quarter U.S. GDP growth on April 28. Economists expect to see that the economy has grown at an annualized rate of just 1.1% in the quarter. That would be a huge drop from the 6.9% rate in the fourth quarter of 2021. But they warn that the headline number will be extremely misleading.
The financial markets have moved from pricing in 50 basis point increases in the Federal Reserve’s target interest rate at the May 4 and June 15 meetings to considering the possibility that the Fed will increase rates by 75 basis points in June and July. A 25 basis point increase is “business-as-usual” for a Fed tightening. 50 basis points at a pop (it takes 100 basis points to make up 1 percentage point) would be very aggressive, but comments from Fed chair Jerome Powell this week certainly put a move of that size on the table.A pair of 50 basis point increases would be the sharpest move by the Fed since January 1982 when the Volcker Fed was fighting to control double-digit inflation
Minutes from the March meeting of the Federal Reserve released Wednesday, April 6, showed that only Russia’s invasion of Ukraine kept the central bank from raising benchmark interest rates by 50 basis points instead the 25 basis-point increase the Fed actually instituted at that meeting. “Many” Fed officials viewed one or more half-point increases as appropriate going forward if price pressures fail to moderate. The minutes showed the Fed proposing to shrink its balance sheet at a maximum pace of $60 billion in Treasuries and $35 billion in mortgage-backed securities each month. That’s in line with market expectations
Money markets are pricing in another 225 basis points of increases to the Federal Reserve’s benchmark interest rate by the end of 2022. That’s on top of the 25 basis point increases already delivered in March. The Fed hasn’t done that much tightening–a total of 2.5 percentage points–in one year since 1994.
In remarks prepared for a Tuesday speech to the Minneapolis Federal Reserve Bank Federal Reserve Governor Lael Brainard said “Currently, inflation is much too high and is subject to upside risks. The committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.” And she called for reducing the Fed’s balance sheet as early as next month. The bond market certainly heard Brainard’s remarks as a promise of more action faster.