The risk-on trade since November could bolster Fed Chair Powell's hawkish resolve at this week's key policy meeting, strategist says

• The rise in stocks since the Fed's November meeting will bolster a hawkish stance from the Fed, according to the CEO of Quill Intelligence.
• In focus will be which Powell shows up at the press conference this week - the "scripted dove" or the hawk.

The march higher in stocks since the Federal Reserve's meeting last month will bolster Federal Reserve Jerome Powell's determination to tighten monetary policy next year, according to Danielle DiMartino-Booth, a former advisor at the central bank's Dallas district.

The Federal Open Market Committee this week is widely expected to raise its benchmark interest rate for the seventh time in 2022 as part of its mission to bring inflation back down to its 2% target. While the Fed has been working to cool economic activity by kicking up borrowing rates, the S&P 500 has gained 2% since the November 2 rate increase of 75 basis points,

"The comeback in stocks in recent months translates to loosening in financial conditions in the eyes of Federal Reserve officials," Danielle DiMartino Booth, CEO and chief strategist of research firm Quill Intelligence, said in a note Monday.

"Fed officials have explicitly stated that they aim to dampen animal spirits and wring out the excesses from their own policy being too accommodative for too long. The 'risk on' trade since the November FOMC meeting will strengthen Powell's resolve to press into 2023 with further monetary tightening," said DiMartino Booth, a former advisor to Richard Fisher who served as president of the Dallas Fed between 2005 and 2015.

Stocks advanced after Powell last month signaled that policy makers will downsize rate hikes starting with the December decision as this year's run of increases works its way through the economy. Investors widely expect a rate hike of 50 basis points.

"The real focus in Wednesday's FOMC developments won't necessarily be the magnitude of the rate hike itself, but which Jerome Powell shows up at the podium during the press conference – a kind, gentle and scripted dove prepared to pivot or a hawkish Powell who isn't afraid to jolt markets, as was the case during the last FOMC press conference in early November," said DiMartino Booth.

A half-percentage point rate increase is "still a sizable hike," she said. "The effects of the historically dramatic campaign are being felt in interest rate sensitive sectors such as housing and autos, hence the need to slow the pace of tightening, which is likely to commence on Wednesday."

Along with several more rate hikes in the first quarter of 2023, the Fed will continue to drain liquidity from the system by allowing Treasuries to roll off its balance sheet, said DiMartino Booth.

"The effect of Quantitative Tightening has already manifested in contracting money supply growth, tighter lending standards and the freezing up of asset-backed markets that finance commercial real estate and auto loans," she wrote.