As expected, the Fed raised the federal funds rate by 50-basis points on Wednesday and provided additional details about its plans for scaling back its massive $9 trillion portfolio of Treasuries and mortgage-backed securities (MBS). It will allow its bond holdings to decline by $47.5 billion per month for the next three months and then by $95.0 billion monthly after that, which was consistent with investor expectations.

The big market reaction came during Chair Powell’s press conference which took place shortly after the meeting. When asked whether the Fed might implement 75-basis point rate hikes at upcoming meetings, he responded that this was not an option currently being considered, igniting a substantial rally in both stocks and bonds. On Thursday, however, investors had a change of heart and decided that ruling out larger rate hikes did not change their underlying concerns about inflation. Stocks and bonds completely reversed their gains from the prior day.

The closely watched Employment report released on Friday came in right on target. Against a consensus forecast of 400,000, the economy added 428,000 jobs in April. The largest gains were seen in the leisure and hospitality sectors. The unemployment rate remained at 3.6%, the lowest level since early 2020. Average hourly earnings were an impressive 5.5% higher than a year ago, roughly the same annual rate as last month.

A couple of other significant economic indicators released this week from the Institute of Supply Management (ISM) remained at high levels by historical standards. The national service sector index came in at 57.1 and the national manufacturing index at 55.4. Levels above 50 indicate that the sectors are expanding.