5 Considerations After Fed Raises First Rate Hike For 2023 (NYSEARCA:SPY)

Interest Rates and The Federal Reserve - Sunset — Douglas Rissing

Economists may follow an academic approach in anticipating how the Federal Reserve guides its interest rate policy. The Central Bank will consider the latest CPI report against its 2% inflation target. It will review the non-farm payroll report to warrant its policies to achieve maximum employment.

Investors will have five considerations following the Fed’s first rate hike of the year.

1) Fed Pivot in 2023, Not 2024

In its last meeting, the summary of economic productions indicated a pivot in 2024. Markets think the Fed is bluffing. The S&P 500 (NYSEARCA:SPY) has gained 5.2% so far in Jan. 2023. Coincidentally, the YTD return slightly exceeds the Fed Fund Rate of 5.0%. Any further rally from here suggests that markets are willing to bet the Fed is bluffing to keep rates at current levels.

The bank may look deeper into the economic data to assess the consumer’s financial health. For example, this alarming personal savings rate chart shows that people had the lowest savings level of 2.4 on Sept. 2022. This is below the 5% range from 2010-2020:

People drew down the savings they accumulated from the stimulus checks received during the pandemic. They likely withdrew from their savings to cover the higher costs incurred from inflation.

The Fed might notice that in the last year, savings started to trend higher. Below, the savings rate increased after bottoming in Sept. 2022:

Personal Savings, 1 year — St. Louis Fed

This would support the case to stop raising rates at the next policy meeting or the one after.

2) Bitcoin

The Fed might consider the pricing action in the cryptocurrency market. The sharp rise in Bitcoin (BTC-USD), from the $17,000 support level to as high as around $23,600, is a good indication that markets remain speculative.

Fundamentals for bitcoin did improve. During the FTX bankruptcy, lawyers said the firm recovered $5 billion in assets. Bitcoin’s revival is a response to platforms offering a better level of asset safety. Coinbase (COIN), which has a short float of 24.99%, has gained ~65% YTD. Crypto miner Marathon Digital (MARA), which has a 47.5% short float, has gained 120.5% YTD.

The Fed does not have a banking policy that targets the crypto market or stock market. Crypto stocks may have risen due to a massive short squeeze.

3) Speculation in Meme Stocks

The sudden rallies in meme stocks like Carvana (CVNA), AMC Entertainment’s (AMC) APE (APE), and Lucid Group (LCID) may not go unnoticed by the Fed. The market is inviting speculation again after a rough 2022 stock market. This suggests that credit conditions are still too loose for capital markets.

The Fed may accelerate its quantitative tightening targets to discourage market speculation.

4) Bond Yields

Investors should always keep an eye on the 2-year and 10-year yields. At the time of writing, yields rose again. They are close to 52-week highs.

The bond market’s inverted yield is a sign of a coming recession. Whether a recession arrives or not is a matter of definition. The Q4 2022 gross domestic product rose. The economy will need two consecutive quarters of negative GDP to get a recession label.

5) Job Losses in Technology

Both Microsoft (MSFT) and Alphabet (GOOG) announced five-figure job cuts this month. The Fed will refer to the non-farm payrolls report over specific company actions. Besides, those firms were over-hired during the pandemic. They continued to compete heavily to acquire talent, paying inflated salaries. During the lockdown, demand for technology experienced hyper-growth.

Today, the job cut will right-size the pay level according to the employee’s economic output for the tech firm. The Fed’s rate hike cycle that began last year is slowing wage inflation in the tech sector.

Your Takeaway

The considerations ahead of the Fed meeting did not discuss the size of the interest rate hike. Just as slower inflation does not lower higher prices of goods, smaller rate hikes do not bring the Fed Fund rates lower. Still, a 25 bps hike meets the market’s expectations. A 50 bps hike might shock the stock market enough to cause a sell-off.

The Fed has leading and lagging economic data that it needs to work with. It will strive to achieve the impossible task of a soft landing: moderate economic slowdown following strong growth.

The latest economic reports show that inflation rates are slowing while jobs remain tight. It gives the Fed ample room to keep rates at current levels to a peak Fed Funds rate in the 5% range.