Innovator ETFs: High Stakes & High Expectations

August 5, 2022

What to Watch - High Stakes & High Expectations

Inflation has remained stubbornly high all year, driven by consistent increases in the costs of shelter, food, and medical care. As for this week’s inflation reading, consensus among economists is calling for the headline Consumer Price Index (CPI) to drop to +8.8%, from last month’s +9.1%. After the July Federal Open Market Committee (FOMC) meeting, the market is surprisingly optimistic that the Fed will begin to slow the pace and severity of rate hikes going forward

Looking at the Implied Federal Funds Rate, the current expectation is for additional hikes through the remainder of 2022, with a potential transition to rate cuts in 2023.

“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation”
Fed Chairman, Jerome Powell

July 2022

Source Bloomberg LP as of 8/3/2022.

Source: Bloomberg LP as of 8/3/2022

Rate Cuts? An Aggressive Stance

The expectation for rate cuts is an aggressive stance that has made both the bond market and the equity market vulnerable to a hawkish surprise. Until prices start coming down meaningfully, the Fed will continue to prioritize price stability over growth. As Chair Powell stated, “There isn’t an option to fail”

Several other Fed members have been vocal about current market expectations. Minneapolis Fed President Neel Kashkari made several comments indicating he was surprised by the market’s interpretation, stating the committee was a long way off from the 2% inflation target. Looking at the Fed Dot Plot below, -the chart highlighting each Fed official’s projection of the policy rate, we also see a very different narrative for next year.

“Restoring price stability is just something we have got to do…There isn't an option to fail.”
Fed Chairman, Jerome Powell

July 2022

Source Bloomberg LP as of 8/4/2022.

“Some financial markets are indicating they expect us to cut interest rates next year…I don't want to say it's impossible, but it seems like that's a very unlikely scenario right now given what I know about the underlying inflation dynamics.”
Minneapolis Fed President Neel Kashkari
The Bottom line

Inflation must fall quickly to justify the market’s stance. Any upside surprise to this week’s release could trigger a repricing of both interest rates and equity prices

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