Tag: Jerome Powell

Stocks Surge as End of Fed Hikes Comes Into View

Posted on by slightbourne@noblecapitalmarkets.com

A buoyant optimism filled Wall Street on Thursday as investors interpreted the Fed’s latest decision to stand pat on rates as a sign the end of the hiking cycle may be near. The Nasdaq leapt 1.5% while the S&P 500 and Dow climbed nearly 1.25% each as traders priced in dwindling odds of additional tightening.

While Fed Chair Jerome Powell stressed future moves would depend on the data, markets increasingly see one more increase at most, not the restrictive 5-5.25% peak projected earlier. The CME FedWatch tool shows only a 20% chance of a December hike, down from 46% before the Fed meeting.

The prospect of peak rates arriving sparked a “risk-on” mindset. Tech stocks which suffered during 2023’s relentless bumps upward powered Thursday’s rally. Apple rose over 3% ahead of its highly anticipated earnings report. The iPhone maker’s results will offer clues into consumer spending and China demand trends.

Treasury yields fell in tandem with rate hike expectations. The 10-year yield dipped under 4.6%, nearing its early October lows. As monetary policy tightening fears ease, bonds become more attractive.

Meanwhile, Thursday’s batch of earnings updates proved a mixed bag. Starbucks and Shopify impressed with better than forecast reports showcasing resilient demand and progress on cost discipline. Shopify even managed to eke out a quarterly profit thanks to AI-driven optimization.

Both stocks gained over 10%, extending gains for October’s worst sectors – consumer discretionary and tech. But biotech Moderna plunged nearly 20% on underwhelming COVID vaccine sales guidance. With demand waning amid relaxed restrictions, Moderna expects revenue weakness to persist.

Still, markets found enough earnings bright spots to sustain optimism around what many now view as the Fed’s endgame. Bets on peak rates mark a momentous shift from earlier gloom over soaring inflation and relentless hiking.

Savoring the End of Hiking Anxiety

Just six weeks ago, recession alarm bells were clanging loudly. The S&P 500 seemed destined to retest its June lows after a brief summer rally crumbled. The Nasdaq lagged badly as the Fed’s hawkish resolve dashed hopes of a policy pivot.

But September’s surprisingly low inflation reading marked a turning point in sentiment. Rate hike fears moderated and stocks found firmer footing. Even with some residual CPI and jobs gains worrying hawkish Fed members, investors are increasingly looking past isolated data points.

Thursday’s rally revealed a market eager to rotate toward the next major focus: peak rates. With the terminal level now potentially in view, attention turns to the timing and magnitude of rate cuts once inflation falls further.

Markets are ready to move on from monetary policy uncertainty and regain the upside mentality that supported stocks for so long. The Nasdaq’s outperformance shows traders positioning for a soft landing rather than bracing for recession impact.

Challenges Remain, but a Peak Brings Relief

Reaching peak rates won’t instantly cure all market ills, however. Geopolitical turmoil, supply chain snarls, and the strong dollar all linger as headwinds. Corporate earnings face pressure from margins strained by high costs and waning demand.

And valuations may reset lower in sectors like tech that got ahead of themselves when easy money flowed freely. But putting an endpoint on the rate rollercoaster will remove the largest overhang on sentiment and allow fundamentals to reassert influence.

With peak rates cementing a dovish pivot ahead, optimism can return. The bear may not yet retreat fully into hibernation, but its claws will dull. As long as the economic foundation holds, stocks have room to rebuild confidence now that the end is in sight.

Of course, the Fed could always surprise hawkishly if inflation persists. But Thursday showed a market ready to look ahead with hopes the firehose of rate hikes shutting off will allow a modest new bull run to take shape in 2024.

Fed Holds Rates at New 22-Year High, Hints More Hikes Possible

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve announced its widely expected decision on Wednesday to maintain interest rates at a new 22-year high after an aggressive series of hikes intended to cool inflation. The Fed kept its benchmark rate in a range of 5.25-5.50%, indicating it remains committed to tamping down price increases through restrictive monetary policy.

In its statement, the Fed upgraded its assessment of economic activity to “strong” in the third quarter, a notable shift from “solid” in September. The upgrade likely reflects the blockbuster 4.9% annualized GDP growth in Q3, driven by resilient consumer spending.

However, the Fed made clear further rate hikes could still occur if economic conditions warrant. The central bank is treading cautiously given uncertainty around how past tightening will impact growth and jobs.

For consumers, the Fed’s hiking campaign this year has significantly increased the cost of borrowing for homes, cars, and credit cards. Mortgage rates have essentially doubled from a year ago, deterring many would-be home buyers and slowing the housing market. Auto loan rates are up roughly 3 percentage points in 2023, increasing monthly payments. The average credit card interest rate now sits around 19%, the highest since 1996.

Savers are finally benefitting from higher yield on savings accounts, CDs, and Treasury bonds after years of paltry returns. But overall, households are facing greater financial strain from pricier loans that could eventually crimp spending and economic momentum if rates stay elevated.

“The Fed is deliberately slowing demand to get inflation in check, and that painful process is underway,” noted Bankrate chief financial analyst Greg McBride. “For consumers, the impact is being felt most acutely in the higher costs of homes, autos, and credit card debt.”

Investors have also felt the brunt of aggressive Fed tightening through increased market volatility and falling valuations. The S&P 500 has sunk over 20% from January’s record high, meeting the technical definition of a bear market. Rising Treasury yields have put pressure on stocks, especially higher growth technology names.

Still, stocks rebounded in October based on hopes that easing inflation could allow the Fed to slow or pause rate increases soon. Markets are betting rates could start declining in 2024 if inflation continues trending down. But that remains uncertain.

“The Fed is data dependent, so until they see clear evidence that inflation is on a sustainable downward trajectory, they have to keep tightening,” said Chris Taylor, portfolio manager at Morgan Stanley. “Markets are cheering lower inflation readings, but the Fed can’t declare victory yet.”

In his post-meeting press conference, Fed Chair Jerome Powell emphasized that officials have “some ways to go” before stopping rate hikes. Powell indicated the Fed plans to hold rates at a restrictive level for some time to ensure inflation is contained.

With consumer and business spending still relatively healthy, the Fed currently believes the economy can withstand additional tightening for now. But Powell acknowledged a downturn is possible as the delayed impacts of higher rates materialize.

For investors, the path ahead likely entails continued volatility until more predictable Fed policy emerges. But markets appear reassured by the central bank’s data-dependent approach. As inflation slowly declines, hopes are growing that the end of the Fed’s aggressive hiking cycle may come into focus sometime in 2024, potentially setting the stage for an economic and market rebound.

Inflation Battle Goes On: Powell’s Reassuring Message from the Fed

Posted on by slightbourne@noblecapitalmarkets.com

Federal Reserve Chair Jerome Powell reiterated the central bank’s determination to bring down inflation in a speech today, even as he acknowledged potential economic risks from sustained high interest rates. His remarks underline the Fed’s unwavering focus on price stability despite emerging signs of an economic slowdown.

While noting welcome data showing inflation may be starting to cool, Powell stressed it was too early to determine a downward trend. He stated forcefully that inflation remains “too high”, requiring ongoing policy resolve from the Fed to return it to the 2% target.

Powell hinted the path to lower inflation likely entails a period of below-trend economic growth and softening labor market conditions. With jobless claims recently hitting a three-month low, the robust job market could exert persistent upward pressure on prices. Powell indicated weaker growth may be necessary to rebalance supply and demand and quell wage-driven inflation.

His remarks mirror other Fed officials who have suggested a growth sacrifice may be required to decisively curb inflation. The comments reflect Powell’s primary focus on price stability amid the worst outbreak of inflation in over 40 years. He admitted the path to lower inflation will likely prove bumpy and take time.

Powell stated the Fed will base policy moves on incoming data, risks, and the evolving outlook. But he stressed officials are united in their commitment to the inflation mandate. Additional evidence of strong economic growth or persistent labor market tightness could necessitate further rate hikes.

Markets widely expect the Fed to pause rate increases for now, after aggressively raising the federal funds rate this year from near zero to a current target range of 3.75%-4%. But Powell avoided any definitive signal on the future policy path. His remarks leave the door open to additional tightening if high inflation persists.

The speech underscores the Fed’s data-dependent approach while maintaining flexibility in either direction. Powell emphasized officials will proceed carefully in evaluating when to halt rate hikes and eventually ease monetary policy. The Fed faces heightened risks now of overtightening into a potential recession or undertightening if inflation remains stubbornly high.

After being accused of misreading rapidly rising inflation last year, Powell stressed the importance of policy consistency and avoiding premature pivots. A sustainable return to the 2% goal will require ongoing tight monetary policy for some time, even as economic headwinds strengthen.

Still, Powell acknowledged the uncertainties in the outlook given myriad economic crosscurrents. While rate hikes will continue slowing growth, easing supply chain strains and improving global trade could help counter those drags next year. And robust household savings could cushion consumer spending despite higher rates.

But Powell made clear the Fed will not declare victory prematurely given the persistence of inflation. Officials remain firmly committed to policy firming until convincing evidence demonstrates inflation moving down sustainably toward the target. Only then can the Fed safely conclude its aggressive tightening cycle.

For investors, Powell’s speech signals monetary policy will likely remain restrictive for some time, though the ultimate peak in rates remains uncertain. Markets should prepare for extended volatility as the Fed responds to evolving economic data. With risks tilted toward policy tightness, interest-sensitive assets could face ongoing pressure.

Investors Await Powell’s Speech for Cues on Future Rate Hikes

Posted on by slightbourne@noblecapitalmarkets.com

Federal Reserve Chair Jerome Powell is set to deliver a closely watched speech on Thursday before the Economic Club of New York that could offer critical guidance on the future path of monetary policy.

Markets are looking for clarity from Powell on how the Fed plans to balance improving inflation data against surging Treasury yields and risks of recession. His remarks come at a precarious time – inflation shows early signs of easing but remains well above the Fed’s 2% target, while rapidly rising interest rates threaten to slow economic growth.

Powell faces the tricky task of conveying that the Fed remains vigilant in combating inflation while avoiding cementing expectations for further aggressive rate hikes that could hammer markets.

“Powell has to present himself to investors as the dispassionate neutral leader and allow others to be more aggressive,” said Jeffrey Roach, chief economist at LPL Financial. “They’re not going to declare victory, and that is one reason why Powell is going to continue to talk somewhat hawkish.”

Cues from within the Fed have been mixed recently. Several officials, including Philadelphia Fed President Patrick Harker, have advocated holding fire on rate hikes temporarily to evaluate incoming data. This “wait and see” approach comes after a torrent of large rate increases this year, with the Fed Funds rate now sitting at a 15-year high of 3.75%-4%.

But hawkish voices like New York Fed President John Williams insist the Fed must keep policy restrictive for some time to combat inflation. Markets hope Powell will provide definitive guidance on the prevailing consensus within the central bank.

Policymakers are navigating a complex environment. Inflation data has been gradually improving from 40-year highs earlier this year. But inflation expectations remain uncomfortably high, pointing to the need for further tightening.

“Powell has to present the recent inflation data as welcome news, but not evidence that the job is done,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “The Fed still has more work to do.”

At the same time, the rapid rise in Treasury yields in recent weeks has already tightened financial conditions substantially. Another massive rate hike could be unnecessary overkill.

According to Krishna Guha of Evercore ISI, Powell will likely underscore “that the data has been coming in stronger than expected, but there has also been a big move in yields, which has tightened financial conditions, so no urgency for a policy response in November.”

Markets are currently pricing in a 65% chance that rates remain on hold at next month’s policy meeting. But there is still roughly a one-in-three chance of another 0.75 percentage point hike.

All eyes will be parsing Powell’s speech for any clues or direct guidance on the Fed’s next steps. While he is expected to avoid concrete commitments, his language choices will be dissected for shifts in tone or any hints at changes in thinking around the policy trajectory.

Powell’s remarks will also be scrutinized for takeaways on how long the Fed may need to keep rates elevated before ultimately cutting. Luke Tilley of Wilmington Trust expects Powell “to keep talking about staying vigilant” and the need for rates to remain higher for longer to ensure inflation comes down sustainably.

With growing recession fears on Main Street and Wall Street, Powell faces a defining moment to communicate a clear roadmap of where monetary policy is headed, while retaining flexibility. Walking this tightrope will be critical to shoring up the Fed’s credibility and avoiding unnecessary market turmoil.

All eyes are on the Fed chair tomorrow as investors and economists eagerly await guidance from the man himself holding the levers over the world’s most influential interest rate.

The FOMC Minutes Show Officials Divided on Need for More Rate Hikes

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve released the full minutes from its pivotal September policy meeting on Wednesday, providing critical behind-the-scenes insight into how officials view the path ahead for monetary policy.

The minutes highlighted a growing divergence of opinions within the Fed over whether additional large interest rate hikes are advisable or if it’s time to ease off the brakes. This debate reflects the balancing act the central bank faces between taming still-high inflation and avoiding tipping the economy into recession.

No Agreement on Further Tightening

The September gathering concluded with the Fed voting to lift rates by 0.75 percentage point for the third straight meeting, taking the federal funds target range to 3-3.25%. This brought total rate increases to 300 basis points since March as the Fed plays catch up to curb demand and cool price pressures.

However, the minutes revealed central bankers were split regarding what comes next. They noted “many participants” judged another similar-sized hike would likely be appropriate at upcoming meetings. But “some participants” expressed reservations about further rate increases, instead preferring to monitor incoming data and exercise optionality.

Markets are currently pricing in an additional 75 basis point hike at the Fed’s December meeting, which would fulfill the desires of the hawkish camp. But nothing is guaranteed, with Fed Chair Jerome Powell emphasizing policy will be determined meeting-by-meeting based on the dataflow.

Concerns Over Slowing Growth, Jobs

According to the minutes, officials in favor of maintaining an aggressive policy stance cited inflation remaining well above the Fed’s 2% goal. The labor market also remains extremely tight, with 1.7 job openings for every unemployed person in August.

On the flip side, officials hesitant about more hikes mentioned that monetary policy already appears restrictive thanks to higher borrowing costs and diminished liquidity in markets. Some also voiced concerns over economic growth slowing more abruptly than anticipated along with rising joblessness.

The consumer price index rose 8.3% in August compared to a year ago, only slightly lower than July’s 40-year peak of 8.5%. However, the Fed pays close attention to the services and wage growth components which indicate whether inflation will be persistent.

Data Dependency is the Mantra

The minutes emphasized Fed officials have coalesced around being nimble and reacting to the data rather than sticking to a predefined rate hike plan. Members concurred they can “proceed carefully” and adjust policy moves depending on how inflation metrics evolve.

Markets and economists will closely monitor upcoming October and November inflation reports, including wage growth and inflation expectations, to determine if Fed policy is gaining traction. Moderating housing costs will be a key tell.

Officials also agreed rates should remain restrictive “for some time” until clear evidence emerges that inflation is on a sustainable path back to the 2% target. Markets are pricing in rate cuts in late 2023, but the Fed wants to avoid a premature policy reversal.

While Americans continue opening their wallets, officials observed many households now show signs of financial strain. Further Fed tightening could jeopardize growth and jobs, arguments made by dovish members.

All About Inflation

At the end of the day, the Fed’s policy decisions will come down to the inflation data. If price pressures continue slowly cooling, the case for further large hikes diminishes given the policy lags.

But if inflation remains sticky and elevated, particularly in the services sector or wage growth, hawks will maintain the pressure to keep raising rates aggressively. This uncertainty means volatility is likely in store for investors.

For now, the Fed is split between officials who want to maintain an aggressive tightening pace and those worried about going too far. With risks rising on both sides, Chairman Powell has his work cut out for him in charting the appropriate policy course.