Last week, the Federal Reserve (Fed) caught the market off guard by accelerating its timeline for rate increases due to rising inflationary pressures. The more hawkish tone from the Fed was not expected until later in the year. The result was a flattening of the yield curve, pushing the 30-year Treasury yield below 2% for the first time since February. The drop in long-term Treasury yields comes at the same time that inflation made a 13-year high in May.
Stocks also sold off from all-time highs as the Fed’s comments reduced expectations for a continued supportive monetary backdrop for further equity gains. Over the course of the summer, inflation and economic data will be closely scrutinized as the next major commentary from the Fed on the path for interest rates and tapering of bond purchases will likely come at the Fed’s annual Jackson Hole meeting in late August.
The Fed’s recent comments don’t change my expectation that the stock market will continue to grind higher over the summer and that interest rates will remain contained.
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