Week in Review: August 19, 2022

Markets ended the week lower as investors assessed the recent rebound against a still uncertain backdrop for future Federal Reserve rate hikes and the economy’s overall trajectory. The decline snapped the S&P 500’s four-week winning stretch. Interest rates, measured by the 10-Year Treasury yield, ended the week at their highest level since mid-July. This was driven by the release of the Fed’s latest Federal Open Market Committee (FOMC) meeting minutes and comments from several Fed officials regarding the need for further rate hikes. The US dollar resumed its ascent, fueled by Fed rate hike expectations and ongoing concerns about the strength of the global economy, highlighted by the continued slowing in China.

The release of the Fed’s July FOMC meeting minutes provided mixed messages, rekindling fears that the Fed will remain aggressive in fighting inflation for the time being. Concerning recent signs that inflation might be slowing, due in part to lower gasoline prices, participants noted that such declines “could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound.” Looking ahead, participants agreed that further tightening would be necessary but would be determined by incoming data. The committee also agreed that at some point it would become appropriate to slow the pace of rate increases. However, some participants suggested that once reached, it would be appropriate to maintain a sufficiently restrictive policy rate level “for some time” to ensure inflation was receding. In short, the minutes were ambiguous enough that investors could find passages to support their preferred outlook, whatever that might be.