A Difficult Decision

Investment Insights: Market Update
HIGHLIGHTS:
  • At its meeting today, the Fed raised its benchmark overnight rate by 25 basis points.
  • Financial markets have largely recovered from the recent bank turmoil as stock gauges return to previous levels.
  • The Fed has reached a crucial juncture as shorter-term financial stability is weighed against longer-term economic issues like inflation.
  • Market futures suggest today's hike might be the last for some time, but the Fed has vocally disagreed.

The recent bank turmoil has significantly impacted financial markets despite its fairly tame implications for the larger banking system. While the bank failures were shocking, the causes were exclusive to the collapsed regional banks, and government intervention to protect depositors and the US financial system has been swift and robust. Angst over the issue appears to be fading as stocks climb beyond their values from weeks ago, with the S&P 500 hovering around the 4,000 level ahead of the Fed's meeting today. It seems the main concern for investors is that this hindrance could not have come at a worse time.

We are in a delicate stretch for the US economy. The Fed is using every tool in its chest to cool the overheating economy and contain inflation while simultaneously trying to avoid a significant falloff in growth. History may prove this to be a nigh impossible task. While a few economic areas—such as the labor market—have retained a surprising amount of momentum, other areas, ranging from home prices to manufacturing, are feeling the pinch of drastically higher rates. This recent banking turmoil has created additional uncertainty, clouding the path forward for the Fed. Investors have begun questioning officials on further rate increases as financial conditions tighten and risks of banking instability grow. The Fed has reached a crucial juncture: continue to hike to address rampant inflation and long-term economic issues that may stem from decades of zero-interest-rate policy and quantitative easing, or pause its program to avoid shorter-term financial instability and prospective economic decline.

The market definitely has its own opinion on what the Fed will do. Days after the banking issues arose, investors were about split on whether the Fed would raise rates at its March meeting today. Earlier this morning, however, fed funds futures data reflected an 80 percent likelihood of a hike. This same data a month ago showed markets were expecting the Fed to raise rates to 5.25 percent or even higher this year. Now, market predictions show no further rate hikes and even include a cut in September. However, the Fed vocally disagrees.

At its meeting today, the Fed raised its benchmark overnight rate by 25 basis points to a range of 4.75 percent to 5.00 percent. Officials also signaled that there are more rate increases to come and that cuts are unlikely, indicating its focus on bringing down inflation and confidence that the economy and banking system can endure higher borrowing costs. It seems investors and policymakers starkly disagree on the path forward, and the Fed will need to be abundantly clear on its rate guidance. Those future hikes, or lack thereof, will shape the outlook for financial markets around the world.

Market Dashboard

Financial market data for various time periods covering global asset classes. Data as of March 21, 2023.

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Contributors

[Contributors Section]
Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
, CFA
Chief Investment Adviser