Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, rose 1.4% for the week.
  • From the Fed’s rate-hike kickoff on March 10, 2022 through Wednesday, when the Fed cut rates for the first time since the hikes began, the S&P 500’s return was 35%.

On Wednesday this week, the Federal Reserve’s Open Market Committee (the FOMC) decided to reduce its target interest rate by 0.50%. There was debate in markets about whether the Fed would go with a smaller cut of 0.25%, but it appears that Fed Chair Jerome Powell was able to wrangle FOMC consensus around a larger cut at the outset of its widely expected rate-cutting cycle.

The rate cut decision was somewhat historic as reductions of the magnitude of 0.50% are usually reserved for times of crises or recession. It shows that the Fed is taking the recent gentle increase in unemployment and decline in job openings seriously. As economist Preston Mui noted, Mr. Powell and his colleagues on the FOMC are “surely aware that a scenario where the labor market just gets a little bit worse for a short period of time before rebounding is not something that has a lot of precedent in the historical record.”

Some point fingers at the Fed as to why there isn’t much precedent for the job market rebounding in the historical record. Historically, the Fed has been slow and reactive to deteriorations in the labor market. The move by the Fed this week could be viewed as a real break with the past, a more vigorous defense of full employment.

There were fears that the Fed’s interest rate increases, which began in March 2022, would put millions into unemployment and drive the economy into recession. Certain prominent economists placed a 100% probability on such outcomes. While unemployment has ticked higher, the more dire predictions have not come to pass, yet, and the economy has continued to grow.

In 1970, Martin Zweig, a finance professor and famed stock market investor, coined the term “Don’t Fight the Fed”. The thinking behind the adage is that when the Federal Reserve lowers interest rates and loosens monetary policy, volatility will abate, and stocks will do well. When the Fed is raising interest rates and policy tightens, it is time to get out of the way.

Stocks did suffer in 2022, but from the date of the Fed’s first rate hike (March 14, 2022) through Wednesday, when the Fed cut rates for the first time since the hikes began, the return of the S&P 500 was 35%. Fighting the Fed worked, ultimately.

The last two years have been a good example of why adages such as “Don’t Fight the Fed” should be viewed with healthy skepticism. The Fed garners a ton of attention in the press, but there are myriad other factors that drive corporate profits and the stock market.

One very important factor, which has been given short shrift by investors and politicians of every stripe, is the federal government’s budget deficit, which is running at 7% of US GDP.

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