Welcome to my latest video presentation for Mind Over Markets. The article below is a condensed transcript; for additional details and several charts, watch my video.

I derive pleasure and wisdom from reading Buddhist philosophy. One of the tenets of Buddhism is the wisdom of non-action. At times, doing nothing can carry considerable significance. Last week, the Federal Reserve did nothing. It was a wise move.

At the conclusion of its two-day meeting last Wednesday, the Fed’s policy-making arm, the Federal Open Market Committee (FOMC), refrained from adjusting interest rates for the first time in over a year, maintaining its policy rate following 10 consecutive hikes totaling 5%. I consider the decision to be appropriate, given the decreasing trend in inflation and the indications of a weakening economy.

This latest FOMC decision doesn’t signify the end of rate hikes. Instead, the Fed intends to assess inflation and economic conditions before making any further moves. I anticipate that the Fed will continue to emphasize its commitment to curbing inflation.

The fed funds rate currently hovers between 5.00% and 5.25%. According to the latest projections of analysts, over the long-term, the fed funds rate is projected to trend around 4.75% in 2024 and 3.50% in 2025.

The recent surge in the stock market has gained momentum, partly due to expectations of a less aggressive approach by the Fed. While I don’t believe the market will completely relinquish recent gains, I do anticipate some temporary setbacks arising from shifting expectations regarding the Fed’s actions and incoming economic and earnings data.

However, I believe long-term investors can take advantage of these conditions by purchasing during market dips.

The Fed’s inaction last week cheered investors, driving higher the major U.S. and international indices. The S&P 500 and NASDAQ are both officially in a new bull market. Market breadth is improving, as the New York Stock Exchange Advance/Decline (NYAD) line continues to hover above its 50- and 100-day averages.

Although the central bank’s decision was expected, it was far from an obvious one, considering that the initial reason for the rate hikes was high inflation, which is far from vanquished. However, significant progress has been made in the inflation fight, justifying the Fed’s wait-and-see stance.

The release of the May consumer price index (CPI) on June 13 confirmed the ongoing decline in inflation. The headline CPI is currently at its lowest point in over two years (4%), driven by falling energy prices and less upward pressure from food prices.

More importantly, core CPI, which excludes volatile food and energy prices, continues to moderate. Core CPI has reached its lowest level since November 2021.

The May producer price index (PPI), which measures wholesale prices, was released June 14 and that provided good news as well. The significant decline in the PPI suggests further improvement in CPI during the second half of the year. Although home prices and rents remain concerning, recent indicators suggest that relief may be on the horizon.

In addition to declining inflation, the decision to pause is supported by signs of economic deceleration. Manufacturing activity has been contracting for over six months, and business investment has noticeably declined. Manufacturing production in the U.S. decreased 0.3% year-over-year in May 2023, after falling 0.8% in April.

It’s important to note that a Fed pause does not necessarily mean a permanent halt. Pressing the pause button is not equivalent to hitting the stop button. The latest projections from Fed officials indicate an expectation of two additional quarter-point hikes (a total of 0.50%) this year.

The week ahead…

Here are the salient economic reports to watch during this holiday-shortened week: housing starts (Tuesday); Fed Chair Jerome Powell testifies to House panel (Wednesday); initial jobless claims, existing home sales, Powell testifies to Senate panel (Thursday); S&P flash U.S. services and manufacturing PMIs (Friday).

I just described reasons why you should remain bullish. However, if you’re still 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.

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