The Federal Reserve met Wall Street’s expectations Wednesday, raising interest rates by 0.25%. More about the Fed’s decision (and the market’s bullish reaction), in a minute. First, let’s examine the current divergence between economic reality and public perceptions.

Two new polls reveal that perceptions about the U.S. economy are bleak. And as Fed Chair Jerome Powell stated at his press conference today, the Fed understands the tangible economic effects of perceptions.

A CNN poll found that 53% of Americans believe economic conditions are worsening. In a separate AP-NORC survey, 75% of Americans described the economy as “poor,” with only 25% saying it was “good.”

These gloomy poll results prompted me to conduct a socio-economic experiment. Last Saturday, I attended a neighbor’s cocktail party; most of the dozen or so guests were suburbanites from across the political spectrum. With drink in hand, I roamed the room and asked people: “How would you rate the state of the U.S. economy?”

Every respondent opined that the economy is terrible. When I said they should cheer up because economic prospects in 2023 are better than they think, they scoffed.

Red pill versus blue pill…

I’m reminded of the 1999 film The Matrix, where the protagonist Neo is given a choice between a red pill that will allow him to learn the truth about the Matrix, and a blue pill that will return him to the blissful ignorance of his simulated existence. As an investor, you should always choose the red pill.

In 2021, the real gross domestic product (GDP) of the U.S. increased by 5.7% compared to 2020. This rate of annual growth exceeded the average for the 2010s. GDP increased at an annual rate of 2.9% in the fourth quarter of 2022 and 2.1% in full-year 2022.

In 2022, America gained 4.5 million jobs. The U.S. unemployment rate currently stands at 3.5%, the lowest level in the last 50 years.

Over the past six months, consumer price index (CPI) inflation in the U.S. was 1.9% at an annualized rate (see chart).

The global economy is mending, as well. This week, the International Monetary Fund (IMF) revised upwards its global growth projections for 2023. In its latest update, the IMF estimated that the global economy will grow 2.9% this year, an improvement from the 2.7% expansion the group had forecast in October 2022.

The S&P Global’s flash Composite Purchasing Managers’ Index (PMI) for the eurozone, released last week, rose to 50.2 in January from 49.3 in December. The PMI encompasses manufacturing and services activity.

WATCH THIS VIDEO: Lasting Rally or Another Head Fake?

So why the disconnect, between perception and reality? Partisan media are a huge factor. Most Americans don’t read long-form journalism; their view of the world is shaped by sound bites and cable news chyrons.

Politicians and pundits appear on TV shout-fests to spew falsehoods with impunity. Fearmongering generates ratings, and votes. I actually heard one “analyst” this week compare current conditions to 1932.

Do we still face risks in 2023? Absolutely. The Russia-Ukraine war remains a wild card and higher interest rates will exert a lagging, deleterious effect on growth. But it’s not 1932 again.

The late Senator Patrick Moynihan (D-NY) famously said: “You are entitled to your opinion. But you are not entitled to your own facts.”

Powell lightens up…

Fed officials are data driven and they increasingly acknowledge in their statements and actions that inflation is falling.

The economy has been slowing down, as reflected in the latest manufacturing activity and construction spending numbers released Wednesday. Consumer spending and the housing market also ended 2022 on a weaker footing. But those trends are largely by the Fed’s design, to tame inflation.

Monetary tightening has been disinflationary, without crushing economic growth. An economic “soft landing” is a distinct possibility. At worst, we might face a mild recession in early 2023.

At the end of its two-day meeting Wednesday, the Fed’s policy-making Federal Open Market Committee (FOMC) announced a hike of 0.25% (25 basis points) in the federal funds rate, a step down from its series of 0.50% increases and in line with Wall Street’s expectations. That brings the fed funds target rate to 4.50%-4.75%. The Fed’s decision was unanimous.

At his press conference following the FOMC announcement, Fed Chair Powell said the Fed remained “strongly committed” to bringing down inflation and will take into account financial conditions as it sets policy. He also noted that inflation expectations are “well anchored,” which is “very reassuring” because such expectations can be self-fulfilling.

Investors were cheered by Powell’s lack of stridency and decided to focus on his upbeat comments about disinflation.

The main U.S. stock market indices closed higher Wednesday, in choppy trading, as follows:

• DJIA: +0.02%
• S&P 500: +1.05%
• NASDAQ: +2.00%
• Russell 2000: +1.49%

That said, the benchmark U.S. 10-Year Treasury note slipped to about 3.40%, amid lingering economic doubts.

Calibrating toward growth…

The evidence is mounting that the stock market will rebound this year. We’ve already witnessed a powerful rally in January.

Heading into the Fed’s big move Wednesday, the S&P 500 was trading above its 200-day moving average. That means Wall Street algorithms were buying before the FOMC’s decision, and continued their bullishness afterward. That’s a technical sign of lasting momentum. The market expects another 0.25% rate hike in March, and then a pause.

We’ll continue to experience bumps along the way, but now’s an opportune time to increase your exposure to growth-oriented stocks. That’s why you should consider the advice of my colleague, Jimmy Butts.

Jimmy Butts is the chief investment strategist of our premium trading service Maximum Profit. Jimmy isn’t satisfied delivering mediocre returns that just barely beat the market. Instead, Maximum Profit is designed to present you with opportunities to generate life-changing fortunes.

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John Persinos is the editorial director of Investing Daily.

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