At the July Federal Open Market Committee (FOMC) meeting, the Federal Reserve hiked rates by 75 basis points in a unanimous decision to take the federal funds rate to a range of 2.25%-2.5%. However, stocks soared with the S&P 500 (SPY  ) gaining more than 2.8%, while the Nasdaq 100 (NDX  ) was up more than 4% due to some dovish commentary from Chair Jerome Powell who talked about the Fed slowing hikes and that it would take time for recent hikes to work through the system.

It wasn't necessarily a pivot but more like a prelude to a pivot. Another factor in the market's strength was that the hike had been expected, while there were constructive signs that the Fed was willing to 'pause' to see the impact on inflation of its policies. Specifically, stocks soared about 1% when Powell said that September's meeting would be 'data-dependent'.

The Fed's dual 75 basis point hikes were the largest consecutive hikes since it began targeting the overnight fed funds rate as its primary vector of monetary policy. This rate affects the economy in multiple ways with some of the most impactful being rates on loans, mortgages, and the rate that banks charge each other.

This certainly fits the definition of a 'dovish hike' as Powell made it seem that the Fed was willing to move to a more data-dependent stance. At this press conference, he said, "We'll be making rate hike decisions on a meeting-by-meeting basis. Another dovish feint was acknowledging that recent indicators of spending and production have softened. In terms of a recession, Powell doesn't think the economy was in a recession although he did note a slowdown in growth.

2022 is not even 60% over, yet it featured the most aggressive tightening by the Fed in decades. One reason for the market's risk-off behavior during this period was uncertainty about the inflation trajectory and Fed policy. Now, both seem to have an endpoint with clarity about how it resolves.

In his press conference, Powell acknowledged that growth would have to run below full capacity in order for it to get under control. In a response to a question, he said, "We think it is necessary to have growth slow down. Growth is going to be slowing down this year for a couple of reasons. We actually think we need a period of growth below potential in order to create some slack."

So far, the labor market has held strong although there are more and more reports of layoffs or hiring freezes, especially in the tech sector. Currently, the unemployment rate is at 3.6% which means overall growth remains strong in the economy.