On Wednesday, the Fed delivered the expected rate hike of 0.75%, but was more hawkish than the market had expected. The Fed's growth and interest rates projections moved in the wrong direction, and there is now the likelihood that there will be an additional hike of 0.75% in November, followed by a 0.5% increase in December and two 0.25% hikes in early 2023.
The most important statement that Jerome Powell made at his press conference was, "We have got to get inflation behind us. I wish there were a painless way to do that. There isn't."
Powell used the word "pain" quite often in his remarks and forced the market to accept that the Fed will not be market friendly as it battles to take control of the inflation issue. Investors and traders have grown very used to the Fed riding to the rescue every time there is a substantial pullback in the market, but that is not going to happen this time.
The market is firmly in the jaws of a bear market, and there are no indications that it is going to end soon. The problem is that the market is struggling to fully discount all the bad news. The market has been resistant to Powell's clear hawkishness. He stated that nothing in his message has changed since his comments at Jackson Hole. If anything, the economic situation has become worse, and the Fed has become more resolved to dealing with it aggressively.
The challenge for the market is that there is still a tremendous amount of uncertainty about inflation and the economy, and it is struggling to discount it fully. There has been some lingering hope that the Fed would hint at some light at the end of the tunnel and a potential pivot, but that is not happening.
While the path of interest rates is fairly clear, the impact on the economy is not at all clear. Powell talked about how the housing market was sure to come under tremendous pressure due to higher rates, but he was very vague about the broader economy. The Fed still projects that a recession will be avoided, but most economists scoff at that idea.
This is a bear market. There is a high risk of more downside, and bounces cannot be trusted to last. Embrace those facts but recognize that we will see some fantastic opportunities out of this misery. Hope for the best but prepare for the worst.