Author: Davis Finke, CFA
This week, the Fed’s Open Market Committee concluded its first meeting under new Chair Kevin Warsh. As anticipated, the Fed held rates steady at a target range of 3.50%–3.75%, with no dissent. With that decision widely expected, markets focused primarily on the updated policy statement, new economic projections, and the overall tone from Chair Warsh. The updated economic projections showed a significant increase in projected inflation, a lower GDP outlook, and a slight improvement in the unemployment rate. The policy statement was also shortened significantly and shifted toward a more inflation-focused message, removing the easing bias and forward guidance. In addition, nine officials projected at least one rate hike this year, while six projected two. As a result, the probability of a rate increase by the October meeting has risen to 73%, up from 34% a month ago. The more inflation-focused message and increased rate-hike projections weighed on markets Wednesday, as a “higher-for-longer” rate backdrop would likely be a headwind for stocks. However, following President Trump’s official signing of the interim peace deal with Iran, markets rallied to end the week.
The signing of the peace deal with Iran has paved the way for the reopening of the Strait of Hormuz. As a result, oil prices dropped to their lowest level since March, and the average price of gasoline fell below $4 per gallon. With much of the recent increase in inflation tied to energy prices, investors are now hopeful that headline inflation will moderate in the coming months. That would likely lessen the need for the Fed to raise rates later this year, helping fuel Thursday’s rally across all three major U.S. indexes. Technology continued to be the best-performing sector over the last week, followed by industrials, utilities, and financials. Energy was the worst-performing sector, primarily due to the decline in oil prices.
Looking ahead to next week, investors will be focused on several scheduled data releases, including the May durable goods report for business investment, the May personal income and spending report for consumer spending trends, and the PCE price index for inflation. The core PCE price index is the Fed’s preferred inflation gauge, making next week’s report especially important following the more restrictive tone from this week’s Fed meeting. However, with some of the recent inflation pressure tied to energy prices, and with oil prices now moving lower, investors may be cautious about overreacting to one month of data before the impact of lower energy prices is more fully reflected. In addition, investors will be paying close attention to commentary from FOMC members to gain a better understanding of the hawkish shift from this week’s meeting.
