Last week, the Federal Reserve hinted at just one rate cut by year-end, likely in November or December, as inflation slows but stays above 3%. Despite mixed economic data, the S&P 500 and Nasdaq hit new highs, driven by optimism around AI and solid earnings.

Despite the conflict in Israel, markets rallied early last week, and the potential for added turmoil in the Middle East had not had any measurable impact on the markets through the middle of the week.

Markets have priced in two more hikes, a brief pause and then cuts. But what the markets have overlooked is the possibility of rates staying “higher for longer,” which is beginning to be a more likely possibility.

The Federal Reserve met last week and raised the federal funds rate another 75 basis points (0.75%) to a range of 3.75%-4.00%. This really wasn’t a surprise; the markets pretty much expected the fourth consecutive increase of 75 basis points. (It’s the sixth move upward in 2022.)

The market tanked on the CPI announcement at first, then rocketed back up. The Dow went on a wild swing over 1,400 points; when the smoke cleared, the Dow was up over 800 points and nearly 3% for the day. But by Friday, rising rate fears again gripped the markets and the 10-year Treasury rose above 4%. Both the S&P 500 and the Nasdaq ended down for the week, with the Dow squeaking out a gain.

Inflation isn’t going anywhere fast: CPI came in at 8.2% in September, down just barely from 8.3% last month. The market’s initial response was dismay, dropping significantly before allying at mid‐day.

Stocks were bashed around last week, as concerns about a looming recession and economic slowdown combined with fear the Fed will go too far. U.S. equities are now at their mid-June lows. The Fed will use the job market to gauge if it needs to hold off additional hikes. The defining event of the week was the consumer price index (CPI) report. The CPI numbers for August came in above expectations and dimmed hopes the economy had moved beyond “peak inflation.”