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Despite the recent pickup in inflation, driven primarily by rising energy prices, the Federal Reserve chose to keep the benchmark interest rate unchanged within the 5.25-5.5% range.
However, the markets still went down.
Jerome Powell’s “hawkish” speech, in which he stressed that the pause in interest rate hikes does not signal the end of the tightening monetary policy cycle, is to be welcomed in this regard.
In addition, the downward revision of the 2024 outlook contributed to a brief sell-off.
Based on the updated forecasts, the benchmark interest rate is projected to reach 5.6% by the end of 2023, 5.1% by the end of 2024, and 3.9% by the end of 2025.
But the worst thing for investors was that 12 of the 19 Fed officials expect another rate hike this year. Thus, the risk of something getting out of hand increases.
Moreover, officials such as Mary Daly of the San Francisco Fed, Susan Collins of Boston, and Neel Kashkari of Minneapolis insist that the fight against inflation is not yet over.
Michelle Bowman, a regulatory board member, even urged a further interest rate hike.
One thing became clear: the Fed will only change course if there are clear signs that inflation is under control or if economic and labor market conditions worsen significantly.
However, it is not just these pessimistic prospects that are impacting market sentiment. Fundamental data, including declining profits and slower share buybacks, are also contributing factors.
It is worth adding that the seven stocks in the S&P 500 have grown by more than 50% in 2023, while the other 493 stocks have remained virtually unchanged.
Another challenge that has not yet been discounted is the rise in oil prices, which has already caused inflation to rise and dampened hopes of a near-term interest rate cut in emerging market countries.
As for the week ahead, investors will closely follow macroeconomic data releases to assess the health and outlook of economies.
In the United States and Europe, readings on core inflation measured by the PCE index will be particularly significant, as they could provide clues about future central bank decisions.
