Be Careful What You Wish For

All Eyes on The Fed

Market participants have wished for the Federal Reserve to pause on rate hikes for many months, and we may see that happen after their meeting this week. This is the least clear the market has been on where the Fed will go with only two days away from their meeting. Typically, the market is fully priced on what rate expectations will be. There is much debate on where rates will be because of the concern around the banking system over the last few weeks. Even though the Fed pausing rate hikes is what people have wished for, it may have come at the expense of the banking system. This give-and-take surrounding the market is something we are going to continue watching. Over the weekend, there was a shotgun marriage between two Swiss banking giants, Credit Suites and UBS. UBS will buy its smaller competitor, Credit Suites, with the support of the Swiss banking system. This is news that the market is taking as a positive and shows that we’re doing all the right things and firming up our banking system and capital worldwide. What will be important is what the Fed says after their meeting. Will there be a 25-bais point rate hike, or will there be no hike at all? What the Fed says as the reason behind their decision could reassure markets. The Fed sees data that we don’t see, so if the Fed is confident in our banking system and the strength of our economy, then that’ll likely boost market expectations. In addition, inflation came out last week at 6%, which was in line with expectations. So, the Federal Reserve is getting what it wanted, which is a slow decrease in inflation.


The Bond Market

In a chart shown in this episode, you will see that we’ve had a lot of volatility in the bond markets. It has almost traded like the stock market, in a sense. The chart shows that the curve has flattened, and rates have decreased. The 2-year dropped from around 5% to 3.86% in the span of a week. The 10-year dropped from 4% to around 3.43%. We went from a 100-basis point difference between the 2-year and the 10-year to roughly a 40-point basis differential. Traditionally, once the 2-year goes below the Fed fund rate, that is typically when the Fed looks to pause or to start cutting rates. The 2-year is down about fifty 50-basis points below the current Fed fund rate, so it will be interesting to see what the Fed does with this news and the current situation with the banking system. On another chart in this episode, over the span of one day, you will see what the Fed funds rate looked like before and after the situation with Silicon Valley Bank. It has dramatically changed from having steady rate hikes throughout the year to maybe one rate cut or a pause to pricing and cuts coming along as soon as the middle of the year. All eyes will be watching to see what direction the Fed goes.


Direct Impact

What the Fed does has historically affected the stock market. In the past, the Fed has pushed rates higher than necessary to stop market falls. This time, we need to see a more accommodated Fed to see the market start to rally. Over the last year, we have seen mortgage rates rise. We watched the 30-year mortgage rate go from mid-twos to above seven. That directly impacts individuals looking for homes. As interest rates fall, you should expect to see stocks stabilize and potentially rise. You should see mortgage rates fall, which could help the housing economy and people looking for houses. A great deal of news is coming out this week that will significantly impact where the markets, inflation, and interest rates go from here, and we are watching it closely.


Trey Booth, CFA®, AIF®
Chief Investment Officer
Wealth Consultant
Email Trey Booth here

Ty Miller
Associate Vice President
Email Ty Miller here

Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Economic forecasts set forth in this presentation may not develop as predicted.

No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.

Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.

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