The Feds hawkish pause that wasn't

As expected, the U.S. Federal Reserve Bank paused in its epic run of interest rate hikes this week. However, officials went to great pains to telegraph to the markets that they weren't done yet in raising rates. The markets didn't believe it.

The Federal Open Market Committee statement and Chairman Jerome Powell's remarks afterward warned investors to expect at least two more interest rate increases in the months ahead. Once again, no one at the Fed is even contemplating cutting rates this year. Those revelations rolled off the bull's back. Optimism that the Fed was close to done in their tightening cycle trumped any worries over future rate hikes.

The common wisdom making the rounds of Wall Street is to watch what the Fed does and ignore what they say. If the data continues to come in on the side of a slowing economy and a declining inflation rate, then the Fed will extend its pause or maybe even stop hiking rates altogether. The latest macroeconomic numbers seem to support that view.

Both the Consumer Price Index and the Producer Price Index came in cooler than expected, while the unemployment claims (262,00 versus 242,000 expected) were down on the week. Both would indicate a leveling off in labor gains and further declines in inflation. That is what the Fed wants to see.

Consumer spending continues to chug along, however, which indicates that the consumer is hanging in there and thus supporting the economy.  The markets and the Fed are still waiting to see if 10 straight rate hikes over the last year will have the economic impact that is hoped for—a slowing of the economy, and with it, a further decline in inflation.

It is that reasoning which convinced some members of the Fed to pause while we all wait and see if the economy. And with it, the demand for labor, begins to taper off. Those who think we have already hiked too much point to some leading economic indicators that seem to say the economy is already spiraling downward.

Critics argue that the Fed is making a mistake by relying on indicators that look backward, and that lag what is happening to the economy. Those indicators continue to be an economy that continues to show strength. We won't know who is right until either the Fed breaks something with additional hikes, or the economy manages to come in for a soft landing. I hate to say it, but time will tell.

In the meantime, my forecast for the markets has been spot on. Not only did we surpass my low-end target of 4,325 on the S&P 500 Index, but this week we hit my high-end target of 4,410 as well. My contrarian indicator, the AAII Sentiment Survey had the highest bullish read since November 2021 and the lowest bearish sentiment since July 2021. That indicates to me that the bulls have gone overboard in their enthusiasm.

Stocks are stretched at this point, but the rubber band could stretch further, but not right now. I believe next week we might see some downside in the averages (maybe 100 points give or take on the S&P 500), but then up again too as high as 4,600. At that point (sometime in the next two weeks or so), prepare for a pullback.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.