So the Fed strikes a balanced tone in its May Federal Open Market Committee (FOMC) meeting with its well-anticipated 50 basis point rate hike.

Fed Chair Powell signaled more rate increases are appropriate and that the balance sheet runoff begins in June, all of which was as expected.

“Inflation is much too high,” said  Fed Chair Powell in his opening words, which was interpreted as saying that the Fed would continue along its hawkish path of rate hikes.

Fed Strikes Balanced Tone
S&P 500 returns 2019

Inflation is much too high

FED CHAIR POWELL

Battered bulls were then spared from further carnage when the Fed indicated that it doesn’t want to destabilize financial markets by continuing to tighten.  

Fed Chair Powell made it clear that the Fed will continue monitoring financial conditions when deciding on future rates. 

Investors are coming out of an extremely tough first quarter, with stocks closing out their worst quarter since the pandemic-induced market crash in early 2020. Even bonds, which tend to do well when stocks underperform, posted their worst quarter in four decades. 

The Fed strikes a balanced tone when Fed chair Powell said it doesn’t want to destabilize financial markets

Reading between the lines, this means the Fed is walking back its ultra hawkish stance and could be done bleeding the markets. 

Stock Investors

“Reading between the lines, this means the Fed is walking back its ultra hawkish stance and could be done bleeding the markets”

WEALTH TRAINING COMPANY

The FOMC’s decision not to be enthusiastic about a 75 basis point in future hikes, underscores the Fed, strikes a balanced tone approach

The fear being that the Fed would ignore the market, keep hiking aggressively into a 1929 stock market crash played out and only then reverse its hawkish stance. 

“So a 75 basis point increase is not something that the committee is actively considering,” said Fed Chair Powell

In other words, the Fed is not on the same page as the World Economic Forum mantra where you’ll own nothing and be happy. So no mad max rate hikes on the table calmed the VIX giving risk assets a boost. 

“Fed wanted to see concrete indications that inflation was coming off” – Fed Chair Powell

Powell mentioned the possibility of slower job growth and some slowing of inflation in the monthly figures, which all supported a balanced tone. 

“Fed wanted to see concrete indications that inflation was coming off,” Fed Chair Powell.

So a fed policy transition from hawkish to balanced to neutral and back to dovish monetary accommodation could be a few meetings away.

The US economy contracted 1.4% in the first quarter of 2022, which means not only investors have had a tough Q1, so too corporates and households with budgets squeezed by inflation. 

Fed Powell noted that rate setting, balance sheet adjustments, and yield targeting are not precision tools. Moreover, the Fed’s monetary policy is not effective against supply shocks already know; monetary policy is useful as a glass hammer.

Talk of an imminent recession could be why the Fed strikes a balanced tone.

But the end of the war in Ukraine could be a windfall for the economy.

There are a lot of broken windows to fix, with an estimated 50 billion USD in infrastructure repairs alone, not including damage to residential homes. A US min marshal Ukrianie reconstruction loan with the big farm as collateral will keep the banker jolly and the construction companies busy. Freedom is not free. Is monetizing freedom the new bonanza? 

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