Deciphering the Fed’s signals

The inflation surprises in the first quarter prompted the Fed to reverse its December advice and accept that interest rates will remain high for longer.

Main points

• Data dependency – We rely on reported data to determine the Federal Reserve’s direction, rather than its policy signals. The strength of corporate earnings encourages us to overweight US stocks.
• Market context – US stocks rose on better-than-expected earnings after the Fed meeting confirmed a structurally higher interest rate environment.
• This week – We expect the Bank of England to leave interest rates unchanged this week. Markets have lowered their expectations for rate cuts this year due to the slow decline in inflation.

The inflation surprises in the first quarter prompted the Fed to reverse its December advice and agree at last week’s meeting to keep interest rates high for longer. We live in a world shaped by structural and supply-side forces that create greater uncertainty for the Fed and markets. That’s why we consider new data, rather than signals from the Fed, to assess the direction of monetary policy. We have been seeing high interest rates for quite some time, which the markets are reflecting today. We remain overweight US equities as strong corporate earnings help offset the pressure from high interest rates.