The Fed Breakdown: Promises, Promises

Ahead of the Fed, the markets are up.

SPY is currently at $396.61, as it has gradually ramped up since mid-June.

Image from wallstreet.io

In the past, the markets pre-Fed and post-Fed have almost nothing to do with each other.

But it’s clear, the Fed is raising rates again.

We can look for a 1-point hike. Any deviations from that could cause the market to sell off.

The reason the Fed wants to raise rates is to curtail inflation.

Less inflation sounds good, right?

The problem is, higher rates could slow down the economy –

If they make it more expensive to borrow money, then people take out fewer loans, and that means less money floating around out there.

Businesses may tighten their belts, spend less, hire less and move around less money too.

That could also lead to house prices declining.

That’s a great thing if you want to buy a house, but not so great if you already own a house.

So the Fed has to walk a tightrope. They can’t let inflation get out of hand, but they also don’t want to wreck the economy altogether.

The market is currently trading as if the rate hikes and the balance sheet unwind will actually slow down.

If the Fed insists that isn’t true, that could cause some fireworks…

Most importantly, Fed day and the following day have tended to move in opposite directions…so I would not look at today as the start of a trend.

Instead, I’d look toward tomorrow’s action to predict what’s next for the market.

Until next time,

Mark Sebastian