Fed Puts the Market's Mind at Ease About Hikes

* The stock market sighs in relief as Powell signals rate hikes are off the table.

* Rates will be higher for even longer, suggesting the first cut could become a 2025 event.

The message of the Fed’s latest policy statement is out and Fed Chair Powell’s press conference matches what we laid out in today’s video – the Fed doesn’t see it as appropriate to cut rates until it has more confidence that inflation is sustainably approaching its 2% target. Recent data, the likes of which we’ve discussed with members, means it will take longer for the Fed to get that confidence. And that means we will remain in a data-driven market when it comes to the Fed and rate-cut timing. When asked about a potential rate cut this year, Powell was noncommittal.

So why is the market rallying with the prospect for rates to be higher than longer?

Powell reiterated the Fed’s policy is sufficiently restrictive, and it does not see the need to hike rates any further. Again, this matches the thought process we laid out in today’s video. However, Powell did say that if the Fed determined monetary policy wasn’t restrictive enough it may need to revisit a potential rate hike, but he quickly walked that back saying he doesn’t see that. The message is the Fed will let current monetary policy continue to work, but he did not offer a timetable for how long that might be.

We see the market’s upward move as a sigh of relief that a rate hike is off the table. However, if upcoming data doesn’t show any meaningful progress on inflation, the market will have to wrap its collective head around the probability the Fed’s first-rate cut will slip into 2025. Price data found in today’s April Manufacturing PMIs from ISM and S&P Global suggest that is the likely outcome.

We will continue to follow the data and adjust our thinking and the portfolio as needed.