Fed raised the interest rate, opening the door for more hikes.

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It wasn’t a surprise: a 0.25% rate hike for the FOMC meeting set the stage for the federal fund rate to reach the highest level in 22 years.

Little Guidance, but Economists are optimistic.

Uncle Powell did not provide much guidance on the future rate path or whether he will raise the rate again in September. As often as he did, the Fed is open to future rate decisions based on the incoming data approach.

Indeed, this cautious approach is perhaps the safest decision. The next meeting will be in September. That means the availability of 2 more major reports on the labour market and inflation data that will guide the FOMC towards a decision in the September meeting.

The Fed has been more cautious in declaring the fight on inflation a victory given past experience and that the core inflation rate remains too high and way above the 2% target.

Hawkish hold the best outcome for the equity market

Investors sighed a relief despite some level of hawkish tone by Uncle Powell. It was a mixed signal as some analysts counted the conference call on a slight dovish tone.

More importantly, the Fed staff now see the US to avoid a recession this year. This hints at a potential soft landing, given the economy’s resilience.

This is consistent with the Fed’s confidence in navigating inflation without too much pressure on the economy, which would, in most circumstances in past history, result in a dramatic economic downturn.

Do note that the Fed staff forecast should be seen as independent of the forecasts by FOMC members. Indeed, the Fed appreciates such diversity in opinion and often drives “better decisions”, as some would say.

The lag effects of monetary tightening working their way

One idea that keeps drumming in all meetings is that the Fed is willing to moderate and pause rate hikes with the acceptance that monetary policy has a lag effect and more time is needed to assess the effects of prior interest rate increases on the general economy.

There is one good question raised during the conference call, which is why the Fed does not opt to maintain a pause. Uncle Powell clarified that the Fed is trying to achieve a “sufficiently restrictive” mode to bring inflation back to the 2% target. A broadly consistent firm economy warrants a further hike to be on the safer side. And that’s the outcome of the FOMC meeting.

Markets clearly love what they hear from Uncle Powell. With the strong after-market result from Meta Platforms, all stars are aligned for the market to go higher.

As earnings set the stage for the rally momentum, it is anyone’s guess when a pullback could happen.