Stock Market Rally on Pause as Investors Take Cue from the Fed

After raising interest rates ten times in a row last week, the U.S. Federal Reserve held off on raising rates, waiting to assess how the economy has reacted to the steep rise in interest rates so far. Equity investors also took a moment to reflect this week, putting recent gains on hold until the outlook becomes clearer.

The S&P 500 headed for its first weekly decline since early May, ending the index’s longest streak since 2021. The S&P 500 index has risen about 14% since the start of the year, and is up more than 20% since hitting lows in October. The year Wall Street crossed the technical threshold for the start of a bull market as the term for a period of investment fever. This week’s rate of decline would reduce those gains by just 0.6%.

Stocks of small businesses at risk of a US economic downturn fell further. The Russell 2000 index, which tracks these domestically focused companies, has fallen for days this week, dropping 1.5% through Thursday. It is expected to enter its worst week in three months.

The more cautious and subdued tone of last week’s trading reflected the message sent out by Fed officials: more rate hikes may be needed, further rising costs for consumers and businesses, but more to come Data on inflation will be guided by signals from the economy, jobs, and other indicators. Fed Chairman Jerome H. Powell said in congressional testimony on Thursday that “the data will tell us what to do” about future rate hikes.

In other words, both Fed policymakers and investors await more information to determine whether rates will continue to rise, which will determine how the stock market reacts.

“The market and the Fed are looking at the same data and thinking the same way,” said Paul Christopher, head of global investment strategy at Wells Fargo Institute of Investments. “They weren’t on the same page much this year.”

The Fed acknowledged last week that the economy has proven more resilient than expected as central banks tried to slow it down and, as a result, curb inflation. Investors appear to be acknowledging this week that a strong economy could justify raising rates. In recent months, investors have questioned the Fed’s determination to keep raising rates and boosting stock prices.

Investor bets on the Fed’s number of rate hikes this year are trickling up, with investors now expecting another quarter of a percentage point hike before the end of the year. That number is still lower than policymakers themselves expected to raise rates twice this year, but it is closer than ever. Until recently, investors thought the Fed might cut rates at the end of the year.

Some investors say the remaining disagreement stems from caution expressed by some Fed officials about the outlook. Atlanta Fed President Rafael Bostic has backed rate hikes so far. But this week, he said he expects to keep interest rates at current levels through the end of the year.

Elsewhere, other central banks, including the Bank of England and the Bank of England, continued their rate hike campaigns this week. norges bank norway Surprise investors with big moves that exceed expectations.

Lauren Goodwin, an economist at New York Life Investments, said the wait-and-see approach was justified because the markets and the Fed had “arrived at the same interpretation of the world.” What happens next will depend on how quickly inflation falls, he said.

Gina Smirek contributed to the report.

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