Stocks Down After Fed Decision, Focus Turns To Friday's Employment Report _1010_565x377.jpg) Image: Bigstock Stocks closed sharply lower yesterday after the Fed's FOMC announcement. The Fed raised rates by 75 basis points as expected. What was new was their acknowledgement of the lag that their intertest rate hikes will have on the economy by saying they will "take into account...the lags with which monetary policy affects economic activity." Stocks rallied on the new language as traders interpreted that as meaning they will eventually slow the pace (or stop altogether) to give the rate hikes a chance to work, thus lessening the chance the Fed crashes the economy. But during Chairman Powell's press conference, he reiterated that the rate hikes will continue and that there's still "a ways to go." Stocks turned lower upon hearing that. Nonetheless, he did say "at some point...it will be prudent to slow the pace of increases." And he hinted that could come as early as next month's FOMC meeting. No surprise there as many had already been forecasting a slowdown to 50 basis points in December, which would put the Fed Funds rate effectively at their earlier forecasted target of 4.4% by year's end. Lastly, Mr. Powell suggested that, based on incoming data, interest rates may need to go "higher than previously expected." The Fed previously forecast the terminal rate at 4.6% in 2023. But now, some are expecting that to potentially reach 5% before they stop raising. My takeaway from yesterday – there was something for both the hawks and the doves. On the one hand, rates are likely to slow at the next meeting (December) or the following meeting (February). And at present, there's over a 55% chance they 'only' raise 50 bps in December. On the other hand, they suggested the terminal rate (the rate at which they hold rates steady at for a while), could climb above their previously forecasted 4.6% (maybe rise to 5%?). To me, I didn't hear anything overly negative. They acknowledge inflation is still too high. And they will keep up the fight. But realize they are going to have to slow down pretty soon and see how their monetary policy is working and go from there. At last month's FOMC announcement, stocks traded higher intraday and then plunged by the close. They then proceeded to make new lows within a few short weeks. They traded higher intraday yesterday, then plunged by the close. But that's where I'm expecting the similarities to end. If anything, the Fed's new language (lag) was a positive for the market. And we currently have strong earnings, fairly positive economic numbers (way better than previously feared), and the seasonality couldn't be better (Q4 is the best quarter for stocks, especially in midterm years; Q1 following a midterm year is even better than Q4; and year three of the Presidential Cycle (that's 2023) is typically the strongest of all four years for the market. And we are right at the beginning of this period of strength. So I'm expecting stocks to regroup and head back up. If you'd like to read more about the bullish tendencies for stocks after midterms, and how high they historically go, be sure to read our latest commentary... Utilize the Midterms to Kickstart Your Long-Term Portfolio Best,  Kevin Matras
Executive Vice President, Zacks Investment Research | 
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