The Federal Reserve’s recent decision to slightly raise interest rates has been met with a surprising stock market response, with volatility indices spiking and several major stock indexes experiencing extreme price movements. The situation is seen as a convergence of the stock and bond markets, with the Fed’s concerns about inflation and deficits finally being reflected in the stock market.
Much of the market had previously been ignoring these concerns, with the S&P 500 experiencing an 8% gain since the Fed began cutting interest rates in September. This has led to a concern that the market is overly optimistic and due for a correction.
The bond vigilantes, who have been signaling concerns about inflation and deficits, have been pointing to the rising interest rate trend and the increasing concerns about the impact of Trump’s tariffs on inflation.
Jeff Gundlach of DoubleLine Capital noted that the 10-year Treasury yield has risen over 80 basis points since the Fed began cutting interest rates, despite the Fed’s efforts to lower short-term interest rates. This could be a sign that investors are becoming more concerned about inflation and the impact of Fed policy on the economy.
The Fed’s decision was seen as a surprise move, with many expecting multiple rate cuts in 2025. Instead, the Fed signaled that it could be moving towards a “neutral” rate, despite the strong economy.
However, some bulls are expecting a short-term rally once the Fed’s preferred inflation gauge, Personal Consumption Expenditures (PCE), is released on Friday. If the data suggests that inflation is under control, it could provide support for the stock market.
Overall, the situation reflects a complex interplay between the stock and bond markets, with the Fed playing a key role in driving market sentiment.