Wednesday’s FOMC meeting is of greater importance due to the recent spike in oil prices, which is likely to stoke inflation, and due to potential delays in Kevin Warsh’s Chair confirmation, which could result in Powell remaining in his Chair seat for longer-than-expected. For right now and for the foreseeable future, Powell is still in the driver’s seat and rates are not likely to go lower.
We expect no changes to interest rates on Wednesday, and while the Fed typically looks through oil shocks, we’ll be lucky to get even one rate cut this year, and if it does come, it would likely be towards the end of the year when there is a new Fed Chair and when there is more data to assess on the inflation and jobs front.
The labor market is in a tricky spot, but we are still at full employment and we believe it’s going to take a sizable uptick in the unemployment rate for the Fed to respond with more interest rate cuts. While we believe lower rates are justified right now, we don’t think there is enough appetite at the Fed to lower rates.
The stock market is trying to find a bottom amid this geopolitical-driven pullback. While we believe the conflict could go on for some time, that doesn’t mean the stock market will follow that. Stocks tend to move ahead of various events, like wars, well before they are over.
Valuations in stocks remain attractive, as U.S. stocks are still down for the year, creating a potentially attractive entry point for investors looking to put new money to work.
Monday’s rebound in stocks was encouraging, and while it will take some more time to figure out if the market has bottomed, we think stocks will eventually move past geopolitics and follow their historical midterm election year patterns with a strong fourth quarter rally.
