The Fed Finally Moved

From the desks of Stanley Katz & Lauren Madera

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Markets finished mixed (DJIA: -1.69%, S&P 500: -0.08%, Nasdaq: +0.72%) in a week full of headlines. We would be remiss if we didn’t highlight the call from several prominent AI industry leaders to slow advanced model development, citing societal safety risks. Although AI fears didn’t dissipate, the market reaction did. The Nasdaq climbed while the Dow fell, which brings us to the other headlines: rates and oil. On Wednesday, the Federal Reserve raised the federal funds target rate by a quarter point to a range of 3.75% to 4.00%, its first increase since 2023. The vote was the real surprise. Many observers expected one or two policymakers to dissent in favor of holding steady. Instead, the decision was unanimous. The committee’s own projections now point to one more quarter-point increase before the end of the year. The 10-year Treasury yield had touched 5.04% earlier in the week, its highest level since 2007. It eased after the announcement, as bond markets read the move as a show of credibility. Oil supplied the week’s other storyline. Attacks on Saudi pipeline infrastructure propelled crude higher to start the week, though prices fell sharply on Wednesday when the damage appeared less severe than first reported.

Argus Research’s latest commentary connects oil to rates. As Argus puts it, wartime inflation makes cutting rates all but impossible right now, which is part of why the Fed moved this week despite signs of a softening labor market. The energy picture behind that constraint is more complicated than the headline crude price suggests. Houthi forces seized a port and an island commanding one shipping route while Iranian proxies damaged a major Saudi pipeline. Those two actions closed detours around the Strait of Hormuz and likely tightened supply. Backward-looking inflation readings do not yet reflect the latest attacks. In real time, however, consumers feel the pinch from elevated diesel and gasoline prices.

After a week like that, Capital Group’s economist, equity portfolio manager, and fixed income portfolio manager walk into a bar.

• The economist says: The Fed generally raises rates because the economy is in decent shape.
• The equity portfolio manager says: Businesses whose value rests on distant earnings tend to struggle more when rates rise, while steadier dividend payers hold up better.
• The fixed income portfolio manager says: A 10-year Treasury yield near 5%, roughly where it sat this week, is neither unusual by historical standards nor inappropriate given the outlook. The Fed’s willingness to act on inflation could steady long-term yields rather than push them higher.

No punchline, just three ways to read the same decision. The common thread is that a rate hike is a statement about the economy as much as a cost imposed on it.

Below are links to a number of third-party research reports that we have read and analyzed over the past week. We hope you will find the information interesting, useful, and worthwhile.

Argus:

• Market Stumbles as Oil Spikes and Midterms Approach

Capital Group:

• Fed rate hike: 3 views on what’s next

First Trust:

• S&P 500 Index Still Looks Expensive

Schwab:

• U.S. stocks and economy: How have rate hikes historically affected the markets?

J.P. Morgan Asset Management:

• Why is the Federal Reserve raising interest rates?

Stanley Katz & Lauren Madera, Financial Advisors
ClientFirst Financial Strategies, Inc.
937-293-5500

Source for weekly stock market returns: Barron’s.

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