Caught Between a Hawk and a Hard Place

Nov 8, 2022

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President

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Once again, the Fed – the Federal Open Market Committee (FOMC) to be specific – dominated market discourse last week. The FOMC followed through with a widely anticipated 0.75% rate hike, the fourth consecutive hike of 0.75% and the sixth hike so far in 2022. The Fed has increased its target rate from a range of 0-0.25% in January to 3.75-4% as of last Wednesday. As usual, investors paid close attention to any changes in the FOMC’s written statement – the most notable changes from last week’s meeting were the additions that the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” Additionally, Fed Chairman Jerome Powell added some color around the Fed’s current thinking in his Wednesday afternoon press conference.

The market initially traded higher on the release of the FOMC statement, but Powell’s comments were considered more hawkish than the written statement that sent stocks lower. Powell made it clear that the FOMC feels that they have “some ways to go” before inflation falls back to their 2% long-term target. The December FOMC meeting will almost certainly see another hike and the market is split on whether it thinks the Fed will go ahead with another 0.75% hike or if they will take their foot off the gas and settle for a 0.50% move. Either level of hike would take the Fed’s target rate to its highest level since 2007 as their fight with high inflation continues. Perhaps the most notable development on Wednesday was that “the ultimate level of interest rates will be higher than previously expected.” Prior to this FOMC meeting, rates were expected to peak around 4.7%, the new expectation is for rates to exceed 5%, spelling out how much further the FOMC believes they must go before they reach their policy goals.

As you might have gathered, stocks sold off last week thanks to a combination of factors discussed above and the cumulative effect of an earnings season that has failed to impress so far. While last week’s cumulative returns were negative, Monday marked the end of an October that saw some of the best monthly returns in history for the Dow Jones Industrial Average (DJIA). The DJIA gained 14% in October which was the best monthly performance for the index since 1976 and the best October ever. The S&P 500 (SPX) and NASDAQ Composite (COMP) also recorded impressive returns in October, gaining 8% and 4% respectively. Strong October performance was largely tied to investor expectations around positive market seasonality and early signs that inflation may be easing. Monday was a relatively quiet day (despite it being Halloween) which saw stocks fall ahead of Tuesday and Wednesday’s FOMC meeting.

Tuesday brought ADP’s monthly report on private sector employment which indicated that the U.S. labor market continues to hold up better than expected. Given the current situation the Fed finds itself in, a stronger than expected labor market is actually viewed as a negative development. If companies are still hiring (and potentially competing for labor) then wages are likely still rising, and the Fed has more work to do in their effort to cool the economy. Wage growth is a tricky problem for the Fed because it doesn’t have a natural mechanism to influence wages and higher wages create particularly sticky inflation. Hence, the Fed finds itself trying to slow the economy enough that employers are forced to stop hiring or actively start firing employees. Third-quarter earnings updates have seen a good number of announced layoffs from large companies, but those are either being offset by hiring elsewhere or haven’t had a large enough effect to show up in reported employment figures.

Markets closed sharply lower on Wednesday, as indicated above. The FOMC statement and corresponding press conference led to a 1.6% loss for the DJIA. SPX lost 2.5% while COMP shed 3.4% as large Consumer Discretionary and Technology stocks suffered particularly bad losses. Thursday saw a fourth straight finish lower for U.S. equity markets as investors considered next following after the FOMC meeting and press conference. Treasury yields rose significantly as well as the 10-year treasury yield neared 4.7%, its highest level since 2007. Thursday also saw initial and continuing jobless claims continue their streak of strength as the U.S. labor market remains hot. Stocks broke their recent trend and rallied into the close on Friday afternoon with the three major indices gaining more than 1%. Investors digested more employment data on Friday as the Department of Labor reported that despite adding jobs in October, the U.S. unemployment rate increased to 3.7% as more people searched for work. Also on Friday, rumors swirled that China is on the verge of relaxing its strict Covid-19 policies, a development that would be positive for both global economic growth and global inflation. With four out of five days seeing losses, last week spelled the end of a four-week winning streak. DJIA, SPX, and COMP lost 1.4%, 3.3%, and 5.6%, respectively.

The Fed has remained more hawkish (aggressive in their fight against inflation) than many expected as they’ve found themselves between a rock and a hard place –either risk ending their rate hike campaign too early and allowing inflation to become entrenched or remain hawkish for too long and plunge the U.S. economy into a recession. Persistently high inflation is something Americans haven’t dealt with in nearly 50 years and the Fed has made it clear that they don’t plan on revisiting a 1970s style inflationary environment. It’s a matter of time before the U.S. labor market and economy cool enough that inflation is brought to a ~2% perch.

In addition to a busy slate of earnings we’ll get updates on the housing market, industrial production, jobless claims, and inflation expectations this week.

Date Report



Tuesday 11/8/2022 Election Day
NFIB Small-Business Index (October)


Wednesday 11/9/2022 Fed Speakers
Thursday 11/10/2022 Initial Jobless Claims



Continuing Jobless Claims


CPI y/y (October)



Core CPI y/y (October)



Real Average Hourly Earnings (October)


Federal Budget (vs. prior year)


Friday 11/11/2022 Veterans Day
U of Michigan Consumer Sentiment (November)



U of Michigan 5-year Inflation Expectations


Fed Speakers