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Fed recommits to higher for longer…


  • Following the Fed’s most recent meeting, the equity markets have continued to rally despite additional commentary from the central bankers emphasizing that rate cuts are very unlikely to start in March. Over the weekend, Chair Powell, in an interview on the TV show 60 Minutes, said that he is “pleased inflation is coming down quickly and the economy is strong.”  However, the takeaway from his commentary was that the Fed can afford to be patient when deciding when to start lowering interest rates. It was the very same message he gave at last week’s interest-rate decision, and he also reiterated that the Fed only sees three quarter-point rate cuts this year, whereas the market still predicts as many as six.
  • An unexpectedly robust jobs number on Friday underlined the point that the economy does not need any help from the Fed to keep humming with unemployment of 3.7% and the 4th quarter’s GDP growth of 3.3%. While officials are growing more confident that inflation is heading toward their 2% target, Fed policymakers are unlikely to have the necessary confidence to cut rates by the March meeting, seven weeks from now.
  • Adding a counterpoint of market support in the face of renewed emphasis on rates being higher for longer, the corporate earnings season has turned more positive. With more than half of the S&P 500 having reported earnings, annualized earnings growth of 1.6% is now anticipated for the fourth quarter, according to FactSet. If corporate earnings remain positive, it will represent a second-consecutive quarter of earnings growth.
  • As for international affairs, markets seem to have quietly accepted the ongoing war in Ukraine, the Israeli invasion of Gaza, and the escalating Houthi attacks on Red Sea shipping. At least until they don’t. With the market’s fear gauge remaining near multi-year lows, there is much investor complacency in the face of these potential international flash points.