Investors appear to be preparing for another match-up against their favorite sparring partners at the Federal Reserve today.
Fed officials are hoping they'll be able to ease up on the pace of interest hikes without having to signal any immediate plans to stop. Wall Street, meanwhile, is convinced that the central bank will soon abandon its rate hike regimen.
So will Fed Chair Jerome Powell dampen expectations and reiterate that the fight against inflation still has a way to go, or will the Fed show signs that they're ready to ease up on rate hikes? Tune in at around 2 p.m.
What's happening: Stocks have rallied this month. The S&P 500 just closed out its best January since 2019 (back when Corona was just a beer, not a virus) largely due to inflation data that encouraged investors to expect a pivot from the Fed.
The Federal Reserve is widely expected to raise rates by a quarter percentage point, the smallest rate hike since last March, at the conclusion of its policy meeting Wednesday. Wall Street analysts also expect the Fed will stop hiking altogether by the spring.
Fed officials have repeatedly warned traders' that those expectations are misguided and that more work needs to be done to fight inflation. Defiant investors are counting on a pivot. They may be in for a let down this week.
"Investors seem to have forgotten the cardinal rule of 'Don't Fight the Fed.' Perhaps this week will serve as a reminder," wrote Michael Wilson and a team of economists at Morgan Stanley in a recent note.
Investors are looking for clarity on where rates are going but they're unlikely to find it during the Fed policy announcement, said David Donabedian, chief investment officer of CIBC Private Wealth US.
"At the conclusion of this week's FOMC meeting, we expect the Fed will leave the market hanging on the question of the future of rate hikes and how many we will see," Donabedian wrote in a note. "We expect the Fed to indicate they have more work to do. They will continue their stubbornness in fighting inflation, hesitant to declare victory just yet. This will leave the market hanging on the future of how many rate hikes we will see."
He's preparing for a volatile market reaction.
A final thought: Sick patients are often advised by their doctors to finish an entire course of antibiotics even if they feel better, because they risk relapsing or prolonging the illness if they don't. The same can be said of how the Federal Reserve handles the economy.
Inflation rates have ebbed somewhat while consumer spending and hiring have slowed and wage increases have moderated — the central bank's prescribed interest rate hikes, meant to cool the economy and stall price increases, seem to be working.
But now, investors may be a bit too eager to end treatment, even as Fed officials warn that doing so would be premature.
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