A Hawkish Slowdown Is Bullish For Markets

The Federal Reserve is running the show; this is the message that traders have taken away from last week's minutes from the FOMC meeting. The fact that the minutes of the Federal Reserve's most recent meeting have revealed that the central bank is prepared to slow down the speed at which it increases interest rates is encouraging news for market participants, who have been extremely apprehensive about the Fed's monetary policy.

The reason I refer to this phenomenon as a "hawkish slowdown" is because I want traders to be aware of the fact that the Federal Reserve is still planning to raise interest rates; the only difference is that in the foreseeable future, we are not going to witness a significant increase in interest rates. During their next meeting, the Federal Reserve is most likely going to reveal anything between 25 or 50 basis points. The figure of 50 basis points is still a significant amount; nevertheless, it is less than the 75 basis points or even the whole percentage point that some people had feared in the past.

Concerning inflation, Fed officials have expressed some optimism on the path that inflation is now taking. However, the fact that committee members have acknowledged that they would expose the economy to a much higher level of risk if they proceed at the same rate as before is another encouraging indicator for the risk-takers.

There is a good chance that the stock markets in the United States will go upward. This is mostly due to the fact that it seems as if the Federal Reserve is getting very close to achieving the maximum amount of interest rate rises. However, it is essential to continue to pay careful attention to economic statistics and not get distracted by the Federal Reserve's monetary policies.

For example, one concerning trend that emerged last week was a rise in the number of people filing for unemployment benefits in the United States. This was anticipated during the preceding quarter when U.S. corporations began to announce job cutbacks or freeze head count. Now, if unemployment continues to tick higher, all bets will be off since the manufacturing data in the U.S. has already started to indicate a contraction. The combination of declining industrial statistics and rising unemployment figures might leave a sour taste in the mouths of traders, and it would not be difficult for them to switch their stance from optimistic to pessimistic with respect to the U.S. stock market.

Due to the Black Friday/Cyber Monday shopping holidays, the fact that customers often take advantage of promotions that are made available during this time of year, retail stocks are once again likely to be a significant focus among traders and investors. If consumers have less discretionary income as a result of the rising cost of living brought on by the economic crisis, they are more likely to stretch their dollar and take advantage of the deals that have been introduced during this time period, but they will prioritize spending their money on things that are essential over anything else.

In other words, even if the Fed slows down the rate at which it is hiking rates, it is no guarantee that stocks will go up, especially if the broader economy is contracting and unemployment numbers rise meaningfully.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Central Banks Economy