Fed Pauses, Market Yawns

Yesterday’s decision by the Federal Reserve not to raise interest rates for the first time in more than two years was supposed to be greeted with a big celebration on Wall Street. Initially, stocks did jump higher but the rally fizzled and stocks sold off within an hour after the announcement that the federal funds rate would remain at 5.25%. It was not exactly what the bulls out there were proclaiming would happen when the Fed finally pushed the pause button.

The failure of stocks to make significant progress toward the upside after yesterday’s announcement was an indication of two things. First, investors are still not clear on whether inflation has really been tempered enough that the Fed won’t decide to continue hiking rates at their next meeting in September. In fact, the language of the accompanying statement to the Fed’s announcement admitted that inflation risks remained a concern.

Second, there is a lot of worry out there that the Fed may have overshot in their tightening campaign and slowed the economy down enough to where both corporate profits and the consumer will be negatively affected. In my opinion, yesterday’s pause was a partial admission that the central bank may have gone too far and that the economy is slowing too fast. I think what the central bank is really telling us is that the economy is a lot weaker than people generally think and equities could have a tough slog ahead.

The key going forward will be corporate earnings. This morning, we saw strong numbers from both Cisco Systems and Disney that helped to spur a mild rally before stocks finished down for the day by the close of trading. It’s going to take a lot more good earnings reports and positive news on the inflation front before the market really starts to come back. We are going to be watching the S&P 500 closely during the next couple of weeks to see if it can break through the 1300 mark. If stocks manage to push through, then maybe we are on our way back. Until then, however, stocks remain very risky, and investors should continue approaching this market with extreme caution.