Fed’s 2023 Policy Twists: The Turning Points And Markets Reactions

The Federal Reserve came into 2023 with headline inflation at 6.5% and with interest rates already at 4.25%-4.5%. At this point, inflation had already come down from its peak of 9.1%, and analysts believed the central bank would only make one more hike — with the main rate peaking at 4.5%-4.75%.

With mortgage rates at multi-year highs and markets fearing a housing crash — there was every reason to believe stocks would have had a terrible year, while the U.S. dollar would rise to new highs.

However, the dollar index had already peaked at 114.78 in September 2022 as inflation sat around the 8% mark, while the S&P 500 hit its low a month later at 3,492.

The SPDR S&P 500 (NYSE:SPY), an exchange traded fund that tracks the index, bottomed out at 348 in the same month. Yet, over the course of 2023 to date, it has gained 21%.

Spurred by a staggering rally in tech stocks, the Invesco NASDAQ 100 ETF (NYSE:QQQM) rallied 50% over the year to date.

But a year ago, few were thinking Fed policy in 2023 could have driven such a strong subsequent performance for stocks. Below, we chart the turning points during 2023 that spurred such a performance.

January/February FOMC Meeting

On Feb. 1, the Fed raised the main rate to 4.5%-4.75% with inflation at 6.5%, but slowing. Stocks had risen into the New Year, but the hawkish message: “the Committee anticipates that ongoing increases in the target range will be appropriate,” put the skids on the stock market rally. Over the next month or so, stocks fell by 9%.

“Powell’s hawkish comments following the February FOMC have been more than offset by his decision not to push back aggressively against the recent loosening in US financial conditions,” said Jane Foley, senior FX strategist at Rabobank said at the time.

Also Read: November Inflation Report: CPI Eases To 3.1% Annual Rate Ahead Of Fed Meeting

March FOMC Meeting

On March 22, the FOMC pushed the main rate up to 4.75%-5%, but sounded less hawkish. Powell noted that the banking system was resilient and that recent tighter credit conditions would weigh on households, economic activity and, therefore, inflation.

By March, the headline inflation rate had slowed to 5% and many economists were thinking this would be the peak of rates and stocks began a four-month rally that would put on nearly 20%.

“The…