Federal Reserve ‘Maybe’ Another Big Rate Hike, But Powell Sparks Dow Jones Rally

The Federal Reserve raised the rate by a 75-basis-point for a second straight meeting, and Chairman Jerome Powell indicated a third such increase “might be justified” in September. Still, the Dow Jones Industrial Average converted modest gains into a bigger rally, as Powell said, with even stronger gains for the Nasdaq.


While the Fed is putting its mandate to bring inflation down ahead of concerns about a moderation in economic growth, Powell indicated that policymakers will proceed with caution. His news conference offered a glimmer of optimism that the Fed could be making a soft landing and the sluggishness indicating that the inflationary backdrop is improving.

“It looks like the labor market may be back in balance,” Powell said. He cited weak data in the Labor Department’s household survey and anecdotal evidence from businesses.

Fed Chair Powell Volcker Is Not

Here’s an important tip for stock market investors: Powell will do as much as possible landing the Fed economy. While there’s still a lot of uncertainty about how much the Fed will need to raise rates to bring inflation back to 2%, Powell is indicating that he’s not going to increase it any more or faster. He sees his role differently than Paul Volcker, the Fed chairman who killed the previous inflation outbreak, engineering a recession by raising the Fed’s key rate to 20%.

Financial Situation and Dow Jones

In truth, the Fed meeting didn’t change much. Before the meeting, the Fed’s next meeting, September 20-21, had a more than 50% chance of a 75-basis-point increase. According to CME Group, at the end of their news conference, they were down to 44%. fedwatch page,

But Powell’s news conference showed the Fed isn’t determined to stand in the way of the stock market’s rally. Given the recent rally in the Dow Jones and other indexes, based largely on the expectation that the Fed is nearly hiking and will begin cutting rates early next year, it was unclear whether Powell would be driving the Dow. Will give more room to run.

Fed policy works by tightening financial conditions, which are reflected in stock prices and market-based interest rates. To some extent, higher stock prices, which can boost demand in the economy through a money effect, will counteract policy tightening.

Powell said that if financial conditions loosen to the extent that they are driving demand, contrary to the Fed’s intentions, policy could adjust. Powell may not be particularly concerned about stock prices moving higher due to ongoing balance-sheet tightening. By September, the Fed balance sheet will contract by up to $95 billion per month.

There is some risk in the Fed’s approach. This way Bill AckmanThe founder of Pershing Square Capital Management said: “The more the market believes that the Fed will reverse course immediately, the less effective growth rates will be at controlling inflation, and the more rates the Fed will have to raise.”

Federal Reserve Policy Statement

Inflation has finally peaked with the fall in the prices of gas and other commodities. Meanwhile, unexpectedly weak economic data has started piling up.

Still, the Fed’s statement did not suggest any significant change in the backdrop of inflation. “Inflation remains high, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices and wider price pressures.”

The statement also presented a mixed picture of the economy, even as the red flags of recession are piling up. “Recent indicators of spending and output have softened. Still, job gains have been strong in recent months, and the unemployment rate remains low.”

The 9.1% inflation reading in June’s Consumer Price Index update and 372,000 job gains last month is very refreshing for the Fed pivot. But the Fed will get two more months of data before its next meeting. The real test of policy will be when it becomes clear that the job market is sinking. a Federal taxes slowed Employee paychecks could be as soon as next Friday’s July jobs report shows.

Dow Jones and Treasury Yield Reaction

Shortly after the release of the Federal Reserve policy statement, the Dow Jones was up 0.4%. But after Powell spoke, the Dow’s gains rose to nearly 1.4%. The S&P 500 jumped 2.4% and the Nasdaq Composite rose 4.1%.

The Dow and other major indices bottomed in mid-June, just after the Fed’s first 75-basis-point increase. The Fed intensified its toughening plans after the inflation rate rose to a 40-year high of 8.6% in May’s consumer price index. Still high inflation data for June put Fed policymakers on high alert.

But many Wall Street strategists now think softening economic data, easing inflation and a strengthening dollar mean the Fed will not hike as much as feared. As slow growth turns into a brush with recession, the Fed is seen holding off on raising rates. By the spring of 2023, many think a rate cut could be considered.

That is why the trend since mid-June has been lower Treasury yields and higher stock prices.

The Dow is still up 6.3% from its June 17 lows. It cut its losses from an all-time high of January 4 to just 13.7%. The S&P has recovered 6.9% of its losses and is now 18.25% off its peak close. The Nasdaq has enjoyed an 8.6% jump, but is down 28% from its peak.

The rally comes as the 10-year Treasury yield has fallen back after rising near 3.5%. On Wednesday, the 10-year yield fell by 1 basis point to 2.78%. Short-term yields, more closely tied to Fed rate moves, fell several basis points.

The Dow Jones and other major indices have broken above their 50-day line for the first time since April. This reflects optimism about the Fed pivot, but uptrends are currently under pressure. Make sure to read IBD’s daily big picture The column after each trading day to stay on top of the market trend and what it means for your trading decisions.

please follow jade graham on twitter @ibd_j graham For economic policy and coverage of financial markets.

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