The Federal Reserve raised interest rates by 75 basis points at it June meeting which is the largest hike since 1994. The move led to a brief spurt higher following the decision and Chair Jerome Powell's press conference.
However, this turned out to be a headfake as stocks tumbled to new 52-week lows in the following session as it faces a bleak situation of slowing growth and rising rates. Bonds were also weak, although less so, as long-term bonds seem to be finding a bid in anticipation of an economic downturn. Typically, this would concern the Fed, however, it's primary focus is on fighting inflation.
This was evident in the dot-plot which shows the committee's expectation that rates will end the year at 3.4% and peak at 3.8% in 2023 before rates will start moving lower again. This was a big change from its last dot-plot in March which showed rates ending the year at 1.8%.
There was also bad news in that the committee is hiking even while it is downgrading its assessment of the economy with higher estimates for unemployment and inflation and a lower growth forecast for 2022 and 2023.
One reason that stocks initially moved higher as Powell's statement that a 75 basis point hike was unusual and uncommon. He expects the July meeting to have a hike between 50 and 75 basis points.
He also said that inflation should start to flatten out soon, although the Fed would keep acting until it saw progress.
The only dissent at the Fed meeting was Esther George who voted for a 50 basis point increase and is typically a hawk. Many questioned whether the Fed had risked its credibility after Powell had publicly dismissed the need or possibility of 75 basis point hikes which was one contributor to the 10% rally in stocks that month.
Powell justified this by pointing to the higher-than-expected CPI and recent survey which is showing a continued spike in inflation expectations. It seems that his goal is to curb this rise before they lift their foot off the rate hike button.
However, the problem is that these measures are more correlated to gasoline, food, and energy which are not weakening. But, other parts are rapidly weakening like housing and tech. Another area showing weakness is retail sales which were down 0.3% for the month.