404.445.7885
Fear may have peaked last week, and investor risk appetite may have been reinvigorated, as the Federal Reserve laid out a clear tightening plan tied to combating high inflation and optimism about the economy. The S&P 500 Index ended the week +6.2%, the Dow was +5.5%, and the NASDAQ was +8.4%. It was the best week for the major equity indices in over a year. The 10-year U.S. Treasury bond yield increased to 2.198% at Friday’s close versus 1.971% the previous week.
The Federal Reserve raised the Fed funds rate by 0.25% and signaled up to six more increases over the remainder of the year. The Fed is shifting to fighting inflation now that the labor market has improved. Fed Chair Powell commented, “All signs are that this is a strong economy, one that will be able to flourish in the face of less accommodative monetary policy.“
Seven companies in the S&P 500 Index report earnings this week. The current consensus for 1Q22 is 6.5% earnings growth on 10.9% revenue growth.
In our Dissecting Headlines section, we explain the Fed funds rate.
Financial Market Update
Dissecting Headlines: Fed Funds
The Federal funds rate, or Fed funds rate, is the interest rate that banks use to lends money to each other. As demonstrated last week, the Federal Reserve sets a target range for this rate as part of its monetary policy objectives. At the recent meeting, the Fed raised the Fed funds target rate to 0.25% to 0.50% from the previous range of 0% to 0.25%. Banks will flow this higher lending rate through to other banks and to other loans they make.
The increase in the Fed funds rate is designed to raise the cost of borrowing in order curb some level of consumption. With inflation well above the Fed’s target levels of 2% to 3%, curbing consumption is designed to lower the rate of inflation and keep prices more stable.
Two of the Fed’s key mandates are employment and price stability. Even though inflationary pressures have been in the economy for the past year as consumer spending re-emerged from its COVID-induced slump, the Fed had been reluctant to raise interest rates because the employment recovery lagged. Now that employment has returned closer to pre-COVID levels, the Fed has shifted its focus to inflation.
________________________________________
Want a printable version of this report? Click here: NovaPoint March 21, 2022
To learn more about these topics and our investment strategies, call us at 404-445-7885 or contact us here.
Do you understand your personal investment risk tolerance and the risk of your current portfolio? You can learn these by taking our Risk Analysis Questionnaire.