Fed’s ‘Hawkish Pause’ Looms Large Over Wall Street

The S&P 500 closed at approximately 4,450 points. Brent oil experienced initial gains but eventually fell after briefly reaching $95 per barrel on Monday, raising concerns about inflation. Apple Inc. witnessed a rise in stock value, whereas Tesla Inc. witnessed a decline due to Goldman Sachs Group Inc. reducing their earnings forecasts for the electric car company. The yield on 10-year Treasury notes decreased slightly, while the yield on two-year notes remained above 5%.

Starting with the Federal Reserve on Wednesday and ending with the Bank of Japan two days later, significant meetings will occur involving half of the Group of 20 nations to decide on monetary policy. The central banks of developed economies may attract additional scrutiny as global policymakers adapt to the idea proposed by US officials at the Jackson Hole conference in August, indicating that interest rates may likely stay higher for a longer duration.

Traders will be watching the dot plot summary of economic predictions carefully as the Federal Reserve is expected to keep interest rates stable this week. The main concerns revolve around whether policymakers will stick to their forecast of a 0.25% increase by the year-end and how much easing they anticipate for 2024. The previous projection in June indicated an expected decrease of 1 percentage point.

Megan Horneman, the head of investment strategy at Verdence Capital Advisors, anticipates that the Federal Reserve will pause its interest rate hikes for now and adopt a more careful approach. However, Horneman believes that the futures market will still respond and raise the chances of another rate hike by the end of the year. Horneman expresses worry about a potential rise in inflation, particularly if energy prices begin to impact overall costs. As a result, she suggests that the Federal Reserve may need to indicate that they are not yet done with increasing rates.

David Kelly, the chief global strategist at J.P. Morgan Asset Management, anticipates that the Federal Reserve will stick to a strong position, indicating possible increases in interest rates until 2023. Nonetheless, Kelly also recognizes the chance of a slower and more gradual method of relaxation in the coming years. Despite these intentions, there is a worry that if there is an economic downturn, the Fed may have to adopt a more forceful and rapid approach to easing.

Kelly recommends having a diverse investment portfolio, emphasizing a careful approach to stocks and a focus on long-term fixed income investments. This is necessary because there is a growing chance of an economic decline as monetary tightening continues.

Lisa Shalett, a specialist in Morgan Stanley Wealth Management, states that even though certain investors are hopeful about the advancements in headline inflation, a crucial indicator closely observed by Fed Chair Jerome Powell suggests an extended period of elevated interest rates.

The speaker noted that the US stock markets are eagerly predicting a favorable scenario where interest rates rise to their peak and both the economy and corporate earnings experience a resurgence. However, she is skeptical about the argument that growth will accelerate and profit margins will expand, which is the optimistic viewpoint. Instead, she believes it is more probable that US stocks will remain relatively stable over the next six to nine months, with only minor fluctuations in earnings and market multiples.

Paul Nolte, who works at Murphy & Sylvest Wealth Management, notes that the current two months, known for their relative weakness, are aligning with his expectations and following the usual pattern.

Nolte claimed that according to the playbook, there will be a continued decrease in the upcoming weeks until October’s middle or end, and thereafter, a surge by the year’s end. This surge is anticipated due to the expected rise in earnings during this quarter. Typically, when earnings increase, stock prices also tend to rise. Nonetheless, numerous stocks in the market are already valued quite high compared to past norms, so there may not be ample space for additional growth.