The Fed raises rates another quarter-point … the Fed seems ready for a pause, but leaves the door cracked to more tightening … a look at the confusing labor market
Today, the Fed raised interest rates another quarter-point in a move that was widely-anticipated.
The Federal Funds target rate now stands at 5.00% – 5.25%.
As to where we go from here, the bulls got a win by the removal of a key sentence that was in the Fed’s previous policy statement.
Here’s CNBC to explain:
The document omitted a sentence present in the previous statement saying that “the Committee anticipates that some additional policy firming may be appropriate” for the Fed to achieve its 2% inflation goal…
During Wednesday’s press conference, Chairman Jerome Powell said…the change in the statement language around future policy firming was “meaningful.”
For context, a reporter had just asked Powell about how likely the Fed will be to pause rates in June. That’s when Powell pointed the reporter back to the policy statement and this “meaningful” omission.
That certainly sounds like Fed members aren’t looking for another rate-hike in June unless the data force their hand. The removal of this line is basically the Fed’s way of signaling that – at least for the moment – it believes they can pause rate hikes next month.
While you might think that would be enough for the market to soar, Powell didn’t sound as dovish as many had hoped. Rather, he left the door open to more tightening if necessary.
On that note, in his live press conference, Powell kept all options on the table when he said:
Looking ahead, we’ll take a data-dependent approach to determining the extent to which additional policy firming may be appropriate.
Powell added that the Fed is “prepared to do more if greater monetary policy is warranted.”
However, the real dagger-to-the-heart for bulls was Powell’s commentary surrounding rate-cuts.
From Powell:
We on the committee have a view that inflation is going to come down not so quickly. It will take some time, and in that world, if that forecast is broadly right, it would not be appropriate to cut rates and we won’t cut rates.
If we look at the market’s reaction, this wasn’t the bull-market coronation that many had wanted.
All three major indices flipped on the day, going from “up pretty nicely” to “down pretty substantially.” The Nasdaq, which was up more than 1% earlier, ended today down nearly 0.50%. The Dow and S&P ended down 0.80% and 0.70%, respectively.
For more on why the market isn’t pleased, let’s turn to legendary investor Louis Navellier
From Louis’ Special Market Update podcast earlier this afternoon:
Well, we have our FOMC statement. And, first of all, they, the Fed did increase rates by 25 basis points as most on Wall Street anticipated.
I personally think that’s a mistake, but they did it.
They removed the language that they would continue to raise rates. So that’s a bit of a victory. But they didn’t say they were going to stop raising rates, so they kind of left everybody hanging…
That wasn’t the best statement.
Louis is sure to have more analysis in the coming days. We’ll keep you updated.
In the meantime, given Powell’s hat-tip toward the “data,” let’s turn our attention toward one key data source that will impact whether or not we can avoid a recession…
The labor market.
We’re getting mixed signals from the labor market, which increases the chances of a policy mistake
The labor market feels bipolar right now.
For example, this morning, the private payrolls report from ADP showed a surge in payrolls.
Here’s CNBC:
Hiring at private companies unexpectedly swelled in April, countering expectations for a cooling job market ahead, payroll processing firm ADP reported Wednesday.
Private payrolls rose by 296,000 for the month, above the downwardly revised 142,000 the previous month and well ahead of the Dow Jones estimate for 133,000. The gain was the highest monthly increase since July 2022.
So, our economy is robust, right?
Well, yesterday, we learned that Morgan Stanley is going to slash roughly 3,000 jobs by the end of June. That’s about 5% of its workforce.
And that’s just the latest in a growing number of companies reducing headcount.
In April alone, we saw cuts from Dropbox, Disney, GAP, 3M, First Republic, Ernst & Young, Deloitte, Lyft, David’s Bridal, and Walmart, to name a few.
Here’s Business Insider:
A wave of layoffs that hit dozens of US companies toward the end of 2022 shows no sign of slowing down into 2023.
The layoffs have primarily affected the tech sector, which is now hemorrhaging employees at a faster rate than at any point during the pandemic, the Journal reported.
According to data cited by the Journal from Layoffs.fyi, a site tracking layoffs, since the start of the pandemic, tech companies slashed more than 185,000 in 2023 alone — compared to 80,000 in March to December 2020 and 15,000 in 2021.
But it’s not just tech companies that are cutting costs, with the major job reductions that have come from the Gap, along with FedEx, Dow, and Wayfair.
So, we have rising layoffs despite a blowout ADP report.
And in the meantime, the unemployment rate remains near historical lows.
How do we make sense of this? And what does this mean for the stock market?
What history suggests about rate hikes, the unemployment rate, and a potential recession
The Fed’s goal is to ever-so-slightly nudge-up the unemployment rate without spiking it, sending the economy into a recession (which, by extension, would hurt corporate earnings, which impacts your portfolio).
Big picture, today, the U.S. unemployment rate stands at 3.5%. This is only slightly up from January’s 3.4%, which equaled the lowest level since 1969.
You’d be hard-pressed to find anyone who would argue that we’re about to witness a robust economy that pushes unemployment down below 3.4% or lower, powering a massive bull market.
But what about the “soft landing” that many bulls expect? Especially, now that the Fed might be done raising rates?
Well, anything is possible, but we profiled the challenge of a soft landing in our April 10th Digest:
Below, we look at the U.S. unemployment rate dating back to the late-1960s. This is in red.
We’ll also show the Fed Funds Effective Rate in blue.
There are two things to notice…
First, when the Fed Funds Effective rate (in blue) surges to a peak (usually topping out above the unemployment rate in red), we nearly always see a related jump in the unemployment rate in the ensuing months.
It was more exaggerated in the 70s and early 80s, but it remains true in the last two decades.
Second, every single time the unemployment rate (in red) has begun from a level under 4%, the ensuing jump in the unemployment figure has taken the unemployment rate up to 6%+, at a minimum.
There is no example of the Fed being able to just nudge the unemployment rate up from, say, 3.6% to 4.2% or 4.8% at which point it hits a rough equilibrium then cools…
Bottom line: Unemployment tends to take the stairs down, but the elevator up.
Here’s how this looks.
Chart showing the Federal Funds rate and long-term unemployment. The Fed Funds rate spikes before a related spike in unemployment. The Fed Funds rate just spiked.
Source: Federal Reserve data
The fact that the Fed raised rates yet again today increases the risk that an attempted “unemployment nudge-up” turns into a full-blown unemployment geyser, which would usher in the recession we’d all like to avoid.
On that note, let’s turn our attention to a potential recession and how that impacts the stock market.
Was last year’s bear market early? And does that mean this year’s bull market also is early?
Let’s begin with Ed Clissold of Ned Davis Research, who spoke on CNBC yesterday:
On average, the market peaks about six months before the start of a recession. There’s been some variation around that, but the longest we’ve gone is about 17 months.
So, if we peaked in January of 2022, once we get to mid-year [2023], we would have blown past that record.
And so, what happened last year was the market went down in anticipation of a recession that just hasn’t happened yet. And so, we have this window, because of the resilient economy, for the market to rally.
Maybe we just a little ahead of ourselves in anticipating the recession that was supposed to start last year that just hasn’t happened.
So, this leaves us at an interesting fork in the road.
On one hand, if the U.S. economy somehow skirts a recession, then the stock market’s 2022 bear market (which lingers today) was to some degree unwarranted. That would suggest the market can rally from here.
On the other hand, perhaps last year’s bear market was simply early. It was a selloff in preparation for a recession that is simply slower in developing than in past years.
But if that’s true – and if a recession truly is coming – then the S&P’s 15% rally since October is itself too early, and the market is priced too high relative to the coming recession.
So, which is true?
Clearly, no one knows, but avoiding a recession appears increasingly difficult, especially given the Fed’s rate-hike today.
And so, if we are in store for a late-year/early 2024 recession, then that suggests that in the same way that last year’s bearishness was “early” relative to a recession, this year’s bullishness might be early to a post-recession rally.
