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A surprise in this week’s Fed decision was a hawkish dissent from Kansas City Fed President Schmid, who didn’t want to hike rates. In his published comments today regarding the dissent, one of the things he highlighted was the tailwind from ‘financial conditions’. That’s a code phrase from the Fed that mostly means ‘the stock market’ and what he’s saying is that rising stock prices will boost growth, or at least signal that the Fed isn’t leaning too hard on the brakes.An index published by Goldman
Sachs shows that broader financial conditions are currently the most accommodative they have been in three-and-a-half years and that they’ve only been looser twice since 1990 (ex pandemic).National Bank notes that in other loose periods in 1999 and 2018, the Fed was tightening and now it’s doing the opposite. A model developed by the Fed suggests that, at their current level, financial conditions
could add as much as 1% to growth over the next twelve months. That’s all well and good, but when you add to these figures the
anticipated effect of the three other elements covered in recent days (AI investment, the wealth effect, and fiscal policy), there is
reason to fear that the economy could overheat in 2026. (Keep in mind, we haven’t even mentioned the supply shock that could be
caused by tariffs and the reduction in the labour supply due to stricter immigration policies.) This is certainly a risk that is increasingly
on our minds.
This article was written by Adam Button at investinglive.com.
💡 DMK Insight
The Fed’s hawkish dissent is a signal traders can’t ignore right now. Kansas City Fed President Schmid’s reluctance to hike rates indicates a potential shift in the Fed’s approach, especially as he points to favorable ‘financial conditions.’ This could suggest that the Fed is weighing the economic landscape more cautiously, which might lead to a more dovish stance in future meetings. For traders, this is crucial; it could impact interest rate-sensitive assets like bonds and equities. If financial conditions remain loose, we might see a rally in risk assets, but be wary of volatility as market participants react to any shifts in Fed language. On the flip side, if the market misinterprets this dissent as a sign of weakness, we could see a sell-off in equities, especially if inflation data comes in hotter than expected. Keep an eye on the upcoming economic indicators and how they align with Fed commentary. Watch for key levels in the S&P 500 around recent highs, as a break could signal a shift in sentiment. The next FOMC meeting will be pivotal, so stay tuned for any hints on rate direction.
📮 Takeaway
Watch for the S&P 500’s reaction to upcoming economic data; a break above recent highs could signal a bullish trend as the Fed’s stance evolves.
