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Sep 23, 2022

CPWA Market Update 9/23/2022

CPWA Newsletter Main

This Week's Fed Meeting and Market Action
The Federal Reserve Open Market Committee (FOMC, or "Fed") raised its policy rate this week. The widely-anticipated rate hike came in at 75 basis points (0.75%), bringing the Fed Funds rate to a range of 3.00% to 3.25% and representing a 3% increase since the rate hikes first started in March.

Fed officials also released an update to their Summary of Economic Projections (SEP), where they noted that they expect the Fed Funds rate to reach 4.25% to 4.5% by the end of the year (another 1.25% increase from here) and peak at 4.5% to 4.75% in 2023 before coming down slightly in 2024. These expectations are likely to change, but this is the latest consensus from the Fed.

Chairman Jerome Powell reiterated his focus on doing whatever is required to contain inflation, bringing inflation back to the Fed's target rate of 2%. He stated there are preliminary signs that labor market pressure may be easing but further progress needs to be made. The Fed accepts that its actions are likely to lead to higher unemployment, a weaker housing market, and a period of below-trend growth, but "restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the long run."

The stock market sold off during and after Jerome Powell's press conference while short-term Treasury yields rose. As we write, the major stock market indices are testing their 2022 lows with all three major market indices (Dow Jones Industrial Average, Standard & Poor's 500, and NASDAQ) back in bear market territory. The yield curve remains inverted with the 2-year above 4.2%, the 10-year hovering around 3.7%, and the 30-year even lower at roughly 3.6%.

The stock market seems to be reflecting a fear that the Fed is going to go too far and its actions will push the economy into a meaningful recession. We admittedly share the fear. On the flip side, we believe that the markets are much closer to a bottom than they are to a top. We continue to keep fixed income portfolios short in duration and high in quality, and we believe short-term Treasuries offer an attractive portfolio supplement. We continue to favor domestic stocks and companies with solid balance sheets and business models that can sustain and even thrive in a slowing economy. As always, if you would like to talk about your specific portfolio or financial situation then please give us a call.

-Team Cerro Pacific


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