This past week saw markets rise sharply following the Midterm elections, which basically were the results most were looking for. The 60 point move up in the S&P 500 was the ninth best ever. That's the good news, because the following two days the markets were hammered and lost about 80% of that move at one point.
History has shown that big up moves like that are lost every time within days or weeks, so a pullback within a continued downtrend should not be a surprise. With that big move and a thought of 'all clear' Wednesday, it was time for the Fed to come to the table and make a decision.
They of course did not raise rates this time around, but they did signal a hike was coming in December, which would be the ninth hike since 2015. The statement was pretty much as expected - hawkish. Inflation expectations may be rising as well, and that would concern the committee.
Friday's PPI number was alarmingly high, annualized at 7.2%. That is well above acceptable to the Fed and may have to not only hike faster but even higher. We'll wait to see how the next month or two look on the inflation front first, one number does not set a trend. The key numbers now are the CPI and wage acceleration in next months job report.
The Fed has been trying (willing?) to allow some inflation to come into the system for years from a strong employment market and strengthening economy. They will move based on inflation expectations, which have been anchored but modestly rising. The tolerant level seems to be about 2-2.5% inflation, above that speed limit and we have a red flag.
The Fed talks about a symmetrical inflation target, which compels them to respond when inflation is too low and too high. By this notion, the committee may have to be more aggressive down the road. The expectation of higher inflation is going to be a concern, but their tools will be used to snuff it out if inflation is out of control. Note on Friday that though the hotter than expected producer prices knocked stocks around, bonds were higher on the day. Perhaps the bond market may embrace an aggressive Fed ahead.