With a wide range of major economic news, it was an extremely volatile week. The actions by the Fed were in line with investor expectations and the Employment report came in very close to the consensus forecast, but mortgage rates ended the week even higher.
As expected, the Fed raised the federal funds rate by 50-basis points on Wednesday and provided additional details about its plans for scaling back its massive $9 trillion portfolio of Treasuries and mortgage-backed securities (MBS). It will allow its bond holdings to decline by $47.5 billion per month for the next three months and then by $95.0 billion monthly after that, which was consistent with investor expectations.
The big market reaction came during Chair Powell’s press conference which took place shortly after the meeting. When asked whether the Fed might implement 75-basis point rate hikes at upcoming meetings, he responded that this was not an option currently being considered, igniting a substantial rally in both stocks and bonds. On Thursday, however, investors had a change of heart and decided that ruling out larger rate hikes did not change their underlying concerns about inflation. Stocks and bonds completely reversed their gains from the prior day.
The closely watched Employment report released on Friday came in right on target. Against a consensus forecast of 400,000, the economy added 428,000 jobs in April. The largest gains were seen in the leisure and hospitality sectors. The unemployment rate remained at 3.6%, the lowest level since early 2020. Average hourly earnings were an impressive 5.5% higher than a year ago, roughly the same annual rate as last month.
A couple of other significant economic indicators released this week from the Institute of Supply Management (ISM) remained at high levels by historical standards. The national service sector index came in at 57.1 and the national manufacturing index at 55.4. Levels above 50 indicate that the sectors are expanding.
Looking ahead, investors will continue to closely follow news on Ukraine and Covid case counts in China. They will also look for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, it will be a light week for economic data with a focus on inflation. In particular, the Consumer Price Index (CPI) will be released on Wednesday. CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services.
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