Is the Fed now fighting inflation or stocks prices? The US Federal Reserve and the interest rate-responsible body of the Federal Open Market Committee (FOMC) have been warning the market that higher rates are coming. Markets have listened seeing as the probability of said rate hike is 95.8% as of today. Down from 99.6%, but still priced as a virtual certainty. The Fed has a dual mandate of stable prices and full employment, but some now think they have an implied, unspoken 3rd mandate of stable asset prices, namely stock prices. Even though US data has slowed in the first quarter, the Fed has gone out of there way in the May FOMC statement and in subsequent speeches, to call the slow down “transitory” and “temporary” while calling an imminent rate hike “appropriate”. Certainly an argument can be made for the US economy being near full employment. The current unemployment rate is at 4.3%, the lowest since May 2001. The counter-argument being that 2001 was a much stronger labor market due to the labor force participation rate being much higher at 66.7% vs. 62.7% today. This hardly seems like a strong case for a rate hike cycle, but also not a warning that one more hike will crush the economy. So what about prices?
Well, in the chart below you will see a steady rise in the Consumer Price Index (CPI) and along with it, a rise in the Nasdaq 100. Lately consumer prices have had a bit of a pullback, but we didn’t see that in the Nasdaq until late last week. If it’s true (and it is) that the Fed raises rates to control rising prices, will we see an acceleration of the price fall
and subsequently an acceleration in the fall of stocks? Is the Fed moving too soon by hiking rates at the FOMC meeting this week if they also need to keep stock prices stable? We will have to see in the post-meeting statement and judge whether or not the Fed is working on a dual mandate or multiple hidden mandates. If they try to calm markets in their statement, then you have to question if they are fighting higher prices or cushioning the stock market.