Earlier this week, the Fed released the minutes from its last meeting in March.

And the major outtake was pretty clear…

If it hadn’t been for the war in the Ukraine, the Fed probably would’ve raised rates by 0.5%.

Today, I’m going to discuss what that means for the markets…

Of course, increasing rates by 0.5% has been something I’ve written about a lot.

However, because the Fed left it too long to try to get back in front of the inflation curve, it’s now playing a massive game of catch up.

That means that when the Fed meets in early May, they’ll have no other choice than to raise rates by 0.5%. Along with at least a couple of 0.5% rate hikes after that…

That’s because the data tells us that the economy is still running way too fast.

Currently, inflation is running at 40-year highs. The most recent data in February showed annual inflation running at 7.9%. Compare that to just a year prior when inflation was running at 1.7% – that’s nearly a fivefold increase!

As for the jobs data, back when the unemployment rate ticked up from 3.9% to 4% at the start of 2022, I wrote that it was likely as close to full employment as we were going to get.

But now, that rate is down to just 3.6%.

Meaning that despite a string of imminent interest rate rises, companies are still looking to hire.

While non-farm payrolls came in around 60,000 below forecast for March, the economy still added over 430,000 new jobs for the month. That’s on top of the blockbuster 750,000 jobs added in February against a then forecast of around 400,000.

On top of the strong jobs number growth this year, wages are rising too…

Average hourly earnings increased 0.4% month-over-month for March (against 0.1% increase the previous month). And, year-over-year data showed wages rising at 5.6% (against the previous month’s 5.2%).

While those rises are helpful to the workforce (though still well below inflation), it all feeds into the price of goods and services, and thereby into the inflation and interest rate cycle.

That’s why the market is already pricing in multiple 0.5% rises. And, it’s why home mortgage rates have already risen to around 5%.

While the latter will take some heat out of property prices (which I wrote about last week), it’s the impact of rising rates on stocks that some folks still don’t quite get.

After finally finding a short-term base mid-March – after the vicious selloff from the start of 2022 – some investors were starting to get bullish again.

They believed that the market would follow the pattern of the last couple of years and rally back up to fresh highs.

However, even before the release of the Fed’s minutes on April 6, the relief rally off the March lows had already run out of steam. Both the S&P 500 and the Nasdaq peaked back on March 29 – over a week prior to the Fed releasing their notes.

The prospect of more (and larger) rate rises off the back of the Fed’s minutes only helped lock in the reversal from their recent highs.

That’s why I repeatedly say that the game has changed and even wrote about it back in February.

Traders are going to need to be very patient and sit on the sidelines. And when the right trade comes along, they’re going to need to jump all over it… and quickly get out.

In the first quarter of the year, we’ve seen some of the bigger hedge funds – some which made a fortune being long tech stocks – start to tear up big chunks of money.

Remember, we’re not just talking about a couple of rate rises here.

If the Fed now raises rates at anywhere near what their recent notes suggest, it could be the biggest tightening cycle in almost three decades.

And that’ll continue to place a huge dead weight over an already struggling market.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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