As the grandfather of twin seven-year-old boys, I’m re-learning the power of conditional parenting. “Yes, you can have ice cream, but only on the condition that you [eat your vegetables, finish your schoolwork, stop hitting your brother…whatever].”

The Federal Reserve announced Wednesday that it won’t hike interest rates this time around, but like a stern parent, Fed Chair Jerome Powell made future rate decisions conditional.

Depending on how the economy and inflation pan out in the coming months, the central bank may resume tightening. Now the big debate on Wall Street is whether the Fed will pause for the rest of 2023, or hike again before the year is out. It might be more accurate to interpret the Fed’s latest move as “skipping” a hike, because it suggested that tightening is not over.

The Fed’s policy-making arm, the Federal Open Market Committee (FOMC), snapped a streak of 10 consecutive rate increases. Since March 2022, we’ve witnessed the Fed’s most aggressive pace of rate hikes since cigar-chomping Paul Volcker’s scorched earth battle against inflation in the early 1980s.

The FOMC met expectations Wednesday by leaving its fed funds rate unchanged at 5.00% to 5.25%, by a unanimous vote. But we’re not about to see a reversal of policy. The Fed’s hawkish stance remains in effect, albeit mitigated. Additional hikes could resume, perhaps as early as the FOMC’s next meeting July 25-26.

The central bank wants to sit back and assess how its previous tightening will pan out in the economy. It can take several months for rate hikes to reveal their full effects.

The decision by the FOMC to hold off on a hike at the end of its two-day meeting came with a projection that (maybe) another two quarter percentage point hikes are on the way before the end of the year.

Powell hath spoken…

Am I tired of writing about the Fed? Of course. But liquidity is the lifeblood of the financial markets, and the Fed controls the monetary spigot. We have no choice but to be diligent Fed watchers.

“I would almost say that the conditions that we need to see in place to get inflation down are coming into place,” Jerome Powell said at his post-meeting news conference. He defined those conditions as “growth meaningfully below trend. That would be a labor market that’s loosening. It will be goods, pipelines, getting healthier and healthier…The things are in place that we need to see. But the process of that actually working on inflation is going to take some time.”

A recent string of subdued economic reports reinforced the Fed’s watch-and-wait stance. The data have some analysts fretting that the Fed has gratuitously damaged the economy by going too far in its efforts to quell inflation.

U.S. gross domestic product in the first quarter slipped to an anemic 1.1% annual pace, as higher interest rates pummel the housing market and businesses slash inventories. Manufacturing activity is sputtering and jobless claims are rising. The consensus is that an outright recession awaits around the corner.

However, also strengthening the case for the pause are two reports this week that show inflation is markedly cooling.

The U.S. Bureau of Labor Statistics (BLS) reported Tuesday that the consumer price index (CPI) for May rose 4.0% on an annual basis and 0.1% month over month, with both numbers in line with estimates. The “core” CPI, excluding food and energy, rose 5.3% year over year, also matching the estimate.

The annual CPI rate of 4.0% for May was down from 4.9% in April and a 40-year high of 9.1% last June.

The BLS reported Wednesday that the annual rate of the producer price index (PPI) slowed sharply to 1.1% for the 12 months ended in May. The PPI, which measures wholesale prices, fell 0.3% on a monthly basis.

Prices for final demand goods fell 1.6%, and the index for final demand services increased 0.2% (see chart).

For both the CPI and PPI, the numbers for May represent the 11th consecutive monthly decline. However, Powell noted that inflation pressures continue to run high and sentiment on the FOMC leans in favor of more hikes. That rattled markets.

WATCH THIS VIDEO: The S&P 500’s New Bull Market Is Underway…What Now?

The main U.S. stock market indices closed mixed Wednesday, in choppy trading, as follows:

• DJIA: -0.68%
• S&P 500: +0.08%
• NASDAQ: +0.39%
• Russell 2000: -1.17%

The benchmark 10-year Treasury yield fell to 3.79%.

It’s worth noting that Powell was hawkish in rhetoric, but not action. However, if you’re nervous about the market risks I’ve just described, I suggest you consider the advice of my colleague, Robert Rapier.

As chief investment strategist of Rapier’s Income Accelerator, Robert has developed strategies that make money in bull or bear markets.

Robert Rapier can show you how to squeeze up to 18 times more income out of dividend stocks, with just a few minutes of “work” each week. Click here for details.

John Persinos is the editorial director of Investing Daily.

Subscribe to the Investing Daily video channel by clicking this icon: