Markets Rally Following Fed Rate Hike

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Today, the Federal Open Market Committee concluded its monthly meeting and announced another 75 basis point hike, marking one of the highest back-to-back increases since the 1980’s.  While that would normally signify trouble for markets, a 100 basis point increase is what traders prepared for in anticipation of more restrictive rates.  The restraint on the part of the Fed to take a more aggressive approach subsequently led to a rally for both traditional and crypto markets, with the S&P 500 closing the day up 2.6%, the Nasdaq Composite gaining 4.1%, BTC over 8%, and ETH over 16% by the days end.       

Coming into July, economic activity was weaker and inflation for June reached a 40 year high of 9.1%.  This prompted the FOMC to focus on maintaining course with the next rate hike as well as change its target federal funds rate to a range of 2.25-2.5%.  However, a key difference from Chairman Powell’s comments today, that has since sent markets into a rally, was the insinuation that the Fed is aware of how its policy drastically affects markets and carries important implications for economic spending.  This signals that, while the Fed has a job and the tools to combat inflation, they may take a less aggressive approach than before in order to allow room for growth from a more positive market engagement.    

For next FOMC session, the Fed will be examining some key data for labor market conditions, assess the alignment between supply and demand, and examine whether inflationary pressures are declining.  An important piece to that assessment will be Friday’s release of the Employment Cost Index from the Bureau of Labor Statistics.  So far, Chairman Powell believes that the current policy is sufficiently restrictive to bring down rates moving into 2023 but additional tightening of policy is still likely for the remainder of the year.  This momentary relief may be short lived depending on what inflation for July looks like.