Understanding the Fed's Message: What It Means for Investors | Episode 066 | 11-01-23

In this episode of "Markets with Megan", we break down the recent Federal Reserve meeting and Treasury funding announcement. Megan discusses that while the Fed did leave interest rates unchanged, the focus is on what they said. They emphasized a "tight" monetary policy, with plans to continue reducing their balance sheet. The standout words were "elevated" and "strong," highlighting a robust job market and economic growth in Q3. She focuses on how this initially boosted equity markets and lowered bond yields. However, a closer look at the press conference reveals that the Fed may not be finished. They're cautious about inflation and its impact on their targets, this suggests higher rates for a longer period. 

Hello, this is Megan Horneman, the chief investment officer for Verdence Capital Advisors. We're coming to you with our regular segment of markets with Megan, and it's been a busy day today, specifically with our prior podcast about the Treasury funding announcement, as well as the Federal Reserve meeting. It was widely expected that the Federal Reserve would leave interest rates unchanged, and they did. We know that. It was priced into the market, but what moves the market and what we're going to dig into deeper is what did they say? What kind of a pause was this? First of all, they're going to keep reducing their balance sheet as well, so they're keeping their policy tight. Remember, there's two different mechanisms that they use. They've been raising interest rates as well as reducing their balance sheet, so they're going to keep that balance sheet reduction program in place.

I think there's a couple of things that we take out of this. There were two words that I lost count on how many times were said elevated and strong. These were put out not only in their statement, but also in the press conference that the Federal Reserve had afterwards. Where did they put these words in? First of all, they continued to say that the job market remains strong. They talked about economic activity and how it expanded instead of a solid pace, but at a strong pace in the third quarter. The equity markets initially rallied pretty heavily on this news. They were up triple digits. The bond market also continued to rally, where yields fell as well. But when you start to read further into what he was saying in the press conference, they really are not saying they're done. They may have to come in again.

Let me just give you some of the comments that were made. They did say that the few months of good inflation is only a start in this inflation fight. They noted that they have a long way to go. They continued to talk about how strong the labor market is, how tight the labor market is. Then they talked about economic data that this could put the progress that they've made on inflation at risk. They even went as far as saying that they are not confident that they've achieved that level of monetary policy that they'll be able to get to that 2% target by all means. People are going to read into this Again.

The equity markets have rallied on this. They've lost some steam with the press conference. In our opinion, they've basically told us higher rates for longer and they may not be done. This is something that we've been talking about quite a bit. I think that the investors have to price this in. There are certain parts of the equity market that are not reflecting this higher interest rate for longer environment. That's all that we have today on the Fed. If you have any questions or comments, please feel free to reach out to podcasts at Verdence dot com. Thank you.