Fed comments rolling back the definitive end of 50-basis-point rate hikes sent the markets tumbling Thursday even as the markets already were resetting interest rate expectations following this week’s hotter-than-expected inflation data.

Stoking those thoughts were comments from Cleveland Fed President Loretta Mester that even ahead of this week’s data she saw a “compelling economic case” for a 50- basis-point rate hike at the Fed’s recent policy meeting. Mester’s counterpart at the St. Louis Fed, James Bullard, commented that policymakers need to be open to bigger rate hikes going forward if economic conditions warrant. Before equities begin trading here on Friday morning, we’ll hear from Richmond Fed President Thomas Barkin and Fed Governor Michelle Bowman and markets will be leaning into their comments about what’s next for monetary policy as they continue to reset fed funds rate expectations.

Are we surprised by the more hawkish tone coming from the Fed?

Not really given the groundwork laid by Fed Chairman Jerome Powell during his recent appearance at the Economic Club of Washington and the economic picture painted by the January data spanning jobs, inflation and consumer activity. The economy has held up better than expected and inflation hasn’t retreated as hoped by the market, and this means the Fed will need to do more. The question tossed around now is how big those bite sizes will be?

Before we jump to any conclusions, we have several pieces of data to come before the Fed exits its next policy meeting on March 22. What comes will refine the likely size of those next steps, but as we head into the long weekend the market is once again going to react first and ask question later.

We will have cooler heads and look for opportunities in quality stocks poised to deliver stronger earnings growth ahead as stocks give back more of their year-to-date gains. Those cooler heads have had us concerned about the market given valuation prospects versus 2023 earnings expectations and technical resistance. That led us to keep the market-hedging inverse ETF positions in play even as we selectively deployed some cash in recent weeks. While those ETFs were a modest drag on the portfolio during January, they are once again doing the job we tasked them with when we brought them into the portfolio.


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