Two weeks have passed since the beginning of Q3 earnings season, and many firms have reported numbers higher than expected. 20% of the S&P 500 companies have reported, and over a quarter of them have outperformed expectations. We’ll provide you with more details on earnings next week, as 37% of S&P 500 companies are expected to report this week.

These stronger-than-anticipated reports fueled the market bounce from last week. Still, another even more important factor fueled the rally – the hint of a slowdown in interest rate increases.

Yes, those are the words that we’ve all been waiting to hear. Christopher Waller, a Federal Reserve Official, said last week that the Federal Reserve members would discuss the rate of tightening at their next meeting. However, he wasn’t the first person to mention a slowdown. Numerous other officials have also expressed a wish to do so.

The idea of slower quantitative tightening is currently being discussed because changes in interest rates take time to affect the economy (typically 6–12 months) and given the rate at which the Federal Reserve has been raising rates, the impacts are likely still not fully realized. Uncertainty lies around the effects that aggressive interest rate hikes would have on the economy; therefore, weighing a slowdown to see what occurs next might be preferable. The lesser of two evils considering continuing with rate hikes increases the probability of bringing the economy to a falter. These comments from Federal Reserve members would make sense since we might end up tightening too much and entering a slower-than-necessary economic decline.

Of course, there are many on the opposing side of this debate who believe that since inflation is expected to be more widespread and persistent, aggressive rate hikes are required. No one is certain, however, how much interest rates must rise in order to control inflation and produce the fantastical soft landing we all desire.

Andrew M. Ochoa
Portfolio Administrator 

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