Despite being short, last week was full of market activity. Fed Chair Powell reiterated that more rate hikes were coming owing to a robust labor market. He added that he wouldn’t dismiss the idea of hiking rates at consecutive Federal Open Market Committee (FOMC) meetings. While saying there is a possibility of an economic downturn, Powell didn’t believe it was the most likely case.
Meanwhile, bankers from the European Central Bank and the U.K. echoed Powell’s comments, declaring that further rate hikes are needed to tame their still-elevated inflation rates. And while many had hoped that the Fed was going to pause or leave interest rates alone for a while, the anticipation of continued rate hikes has steadily increased.1,2
What powered early-week gains? New home sales, durable goods orders, and a rise in consumer confidence proved influential. More so were Thursday’s reports of a drop in initial jobless claims and an upward revision in first quarter Gross Domestic Product growth, which helped ease recession fears.3,4
While risks remain in the second half market rally, if unemployment remains low, and companies can tolerate another hike, it is possible to steer clear of a recession. However, only the relationship between interest rates, unemployment, and economic data is going to determine if the second half of 2023 is as robust as the first. So far, the data has supported a rare possibility that the Fed acted in just the right measure to keep the economy from overheating but also to avoid recession. Time will tell if this time is different, or if something in the economy is going to break and cause economic pain.
- federalreserve.gov, June 13, 2023.
- CME FedWatch, June 6, 2023.
- reuters.com, July 27, 2023.
- ADP_NATIONAL_EMPLOYMENT_REPORT_Press_Release_2023_06 FINAL.pdf. July 2023.
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