The FOMC raised the Fed Funds rate to 4.25% today. They removed the language from their statement that implied their rates were accommodative (read low). They kept in language that measured increases might still be necessary. That means that more Fed tightening is probable.
The stock market liked the change in wording and rallied nicely on the news. The bond market also liked the news initially and rallied, but gave up most of the gain in less than an hour. What was the difference in reaction?
The stock market is reading the statement as saying that the Fed is almost done with tightening. That means that the market can continue to grow unfettered. So, stocks are worth more. That’s why we rallied.
The bond market looked at the statement and saw that the Fed might still need to fight inflation. That means rising interest rates. That means falling bond prices. So, the bond traders went almost back to where they were before the statement.
Where does that leave us?
Slightly positive on stocks through the end of the year, bearish on bonds for the foreseeable future (at least next six months).
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