Markets Gain on Geopolitical Relief Even as Fed Raises Inflation Forecast

Most markets were closed last Friday in observance of Juneteenth National Independence Day. Wall Street rallied last week as investors displayed optimism over the signing of an initial agreement ending hostilities in the Middle East. Market gains were realized despite the Federal Reserve holding interest rates steady at 3.50%-3.75% following the first meeting under new Fed Chair Kevin Warsh. Inflationary pressures continued to influence market developments as the Fed projected the potential for at least one interest rate hike before the end of the year, while upwardly revising its inflation projection to 3.6% (from 2.7% previously forecasted). The interim agreement between the U.S. and Iran also led to a further decrease in crude oil prices, which fell to their lowest levels since early March.

Fed Holds Rates Steady as Inflation Remains Elevated

In one of the briefest statements in quite some time, the Federal Open Market Committee (FOMC), by a 12-0 vote, decided to maintain the target range of the federal funds rate at 3.50%-3.75%. The FOMC noted that economic activity is expanding at a solid pace despite uncertainty due to the conflict in the Middle East. The FOMC also noted that job gains have kept pace with the workforce, and the unemployment rate has changed little. Lastly, the FOMC noted that inflation remained elevated, in part reflecting supply shocks that have driven price increases in certain sectors, including Energy.

Eye on the Week Ahead

There’s plenty of important economic data released this week. The final estimate of first-quarter gross domestic product will be out mid-week. Thus far, the previous estimate has the economy expanding at an annual rate of 1.6%. Also of note this week is the release of the latest report on the Personal Consumption Expenditures Price Index, the Fed’s preferred measure of inflation. In April, consumer prices rose 0.4% for the month and 3.8% over the past 12 months.