The US economy is at a crossroads with gross domestic product having posted negative growth in the first two quarters of the year as factory and other data slows while the jobs market continues to see blockbuster gains month after month. The stock market, meanwhile, has been razor-focused on what the Fed will likely do, ignoring other economic signals.
"There's a bizarre willingness to turn a blind eye to the economic reality at the moment, as long as the Fed doesn't raise rates too fast," said Craig Erlam, an analyst at online trading platform OANDA. "That doesn't feel particularly sustainable but as we've seen so often before, it can last much longer than you may expect."
The S&P 500 index, which represents the top 500 US stocks, closed up 0.4% on the day on Monday. Wall Street’s most important stocks gauge has risen 4% so far two weeks into August, after gaining more than 9% for all of July.
The Nasdaq Composite Index, which comprises marquee names in technology such as Amazon, Apple, Netflix and Google, finished up 0.6%. For August, the Nasdaq is up 6%, following through with July’s gain of more than 12%.
The Dow Jones Industrial Average, which comprises stocks of 30 large US corporations, climbed 0.5% on the day. For the month, the Dow posted an advance of 3%, after July’s win of nearly 7%.
Investors are awaiting the Fed’s release of its July meeting minutes on Wednesday.
The Fed minutes have taken on an increasing importance after a blowout US jobs report for July eased fears over the prospect of recession. Last week’s inflation data, meanwhile, pointed to the largest monthly slowdown in consumer price increases since 1973.
Traders are currently pricing in a less hawkish Fed, with money market traders betting on a greater chance of the central bank raising rates by just 50 basis points when it meets in late September, versus the 75 basis-point hikes carried out in July and June.
The Fed has raised rates four times since March, bringing them to a peak of 2.5% from a high of just 0.25% in February. The central bank says it expects to continue with rate hikes until inflation returns to its target of 2% per year. Inflation, as measured by the Consumer Price Index, grew by 8.7% during the year to July.