Stock market investors from all over the globe awaited the Federal Reserve Chair Jerome Powell’s question-and-answer session with David Rubenstein at the Economic Club of Washington on February 7, 2023. Powell persisted in his position that higher interest rates are necessary to combat inflation and hinted that borrowing costs may rise faster than traders and policymakers expect. The higher-for-longer rate scenario is largely on the back of a strong job market. “The labor market is extraordinarily strong. We think we are going to need to do further rate increases,” said Powell at the interview.
But one message from Powell to the market that raised optimism perhaps for the year ahead was about disinflation. The major equity indices staged a late bounce during Tuesday’s regular session after Federal Reserve Chair Jerome Powell stated that additional rate increases may be required if the labour market remained robust but continued to believe that disinflation has already started.
What it means is that although inflation is falling, the interest rates may continue to rise at least all through 2023.
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The S&P 500 continued its ascent after momentarily declining as investors processed Powell’s speech, ending a two-day decline by closing the day 1.29% higher. Giants Microsoft Corp. and Apple Inc. helped the tech-heavy Nasdaq 100 rise by more than 2%.
There has always been uncertainty about how rising Fed rates will affect corporate profits. The good news is that Earnings per share have decreased 2.8% as against an estimate of 3.3% decrease, as more than half of the S&P 500 companies have already been released. The earnings contraction may not be starting as severely as first feared, as evidenced by the smaller-than-expected decrease, which supports share-price valuations.
The Federal Open Market Committee (FOMC) lifted its benchmark rate by a quarter percentage point to a range of 4.5% to 4.75% on February 1. Powell essentially emphasised that while disinflation has started, there is still a long way to go, and more increases will likely be required if the labour market remains robust. Investors now anticipate that the rate would climb to little beyond 5%, in line with what Fed policymakers predicted in December, in response to January’s hot employment report.