Investment Commentary – January 25, 2022

Year to Date Market Indices as of January 25, 2022
• Dow 34,446 (-4.94%)
• S&P 4,394 (-7.72%)
• NASDAQ 13,708 (-12.2%)
• Barclay Bond Aggregate (-1.82%)
• Fed Funds Rate 0-0.25 (0-0.25)
• Annual Inflation Rate 6.8% (As of 11/21/21)

The Fed is likely to signal a March interest rate hike and that further policy tightening is coming

The Federal Reserve is expected to signal at its meeting this week that it is ready to raise interest rates as soon as March and that it will consider other policy tightening.

The Fed issues its policy statement Wednesday afternoon, at the end of its two-day meeting, and it is expected to show that it is willing to take the steps necessary to fight inflation.

“I don’t think they’re going to be spooked by this,” said one strategist of the stock market’s correction. “They need to tighten financial conditions so they can have a better handle on inflation.”

The Federal Reserve is expected to signal at its meeting this week that it is ready to raise interest rates as soon as March and that it will consider other policy tightening, reversing the easy policies it put in place to fight the pandemic.

The Fed begins its two-day meeting Tuesday, and on Wednesday afternoon, the central bank is expected to issue a new statement that shows it is resolved to fight inflation. Against the backdrop of a violent stock market correction, Fed officials are expected to say they are ready to push up the fed funds rate from zero as soon as March.

“We don’t expect them to sound dovish,” said Mark Cabana, head of U.S. short rate strategy at Bank of America. “The [bond] market seems to be reacting to the drop in equities, plus the geopolitical tensions, so maybe the Fed sounds not as hawkish as they otherwise would have. But we don’t think the Fed is going to come out and tell the market it’s wrong for pricing in four rate hikes this year.”

The Fed has found itself in its first major battle with inflation in decades, after two years of super easy policies implemented to counter the economic and financial impact of the pandemic. The consumer price index in December rose 7%, the highest since 1982.

Cabana said the Fed could indicate that its first rate hike since 2018 could be as soon as the next meeting, which would be March. It made a similar comment in 2015, in the statement a month ahead of its first rate hike following the financial crisis.

The stock market sell-off, if anything, has made the Fed’s job more difficult. The S&P 500 dipped into correction territory Monday, down 10% from its record close, before a giant intraday market reversal. With the pandemic continuing and Russia threatening military action against Ukraine, the Fed will have to acknowledge these risks.

News Around The web:

NASDAQ correction: Underperformance by technology stocks weighed heavily again on the NASDAQ, as the index on Wednesday fell into a correction—a decline of at least 10% from a recent high. The sell-off continued the next two days and, at Friday’s close, the index was more than 14% below a record high that it achieved in mid-November.

Whipsaw market: Thursday’s volatility produced a sharp turnaround, as the NASDAQ had been up 2.1% in midday trading, only to close down 1.3% for the day. The other major indexes also took an abrupt downward turn in the closing hours of trading. For the NASDAQ, it was the index’s lowest closing level in seven months

Busy agenda: At a policy meeting on Wednesday, U.S. Federal Reserve Board members could give further indications as to how many interest-rate increases they expect to make this year to help control high inflation. The next morning, the government is scheduled to release an initial estimate of the nation’s GDP growth rate in the recently completed fourth quarter.

Steeper descent
Stocks fell for the third week in a row, with major U.S. indexes posting their sharpest weekly declines since March 2020, early in the pandemic. The NASDAQ dropped nearly 8%, the S&P 500 fell almost 6%, and the Dow gave up nearly 5% as investors worried about everything from rising interest rates to geopolitical conflict in Ukraine. (indices)