US equities closed sharply higher and ended near best levels following Federal Reserve Chair Jerome Powell’s speech at Hutchins Center on Fiscal and Monetary Policy on the outlook for the economy and the changing labor. S&P 500 was back above 200 DMA, while Dow 30 index was back into a bull market, up more than 20% above the September lows.
As we enter the last month of the calendar year, stock market investors will keep a close watch on what Federal Reserve officials have to say about inflation, interest rates, and the manner in which the economy is shaping up. These factors, after all, have an impact on corporate earnings and stock valuations.
Powell reiterated that the pace of rate hikes will soon slow down – “The time for moderating the pace of rate increases may come as soon as the December meeting.” The next FOMC meeting is on December 13-14 and interestingly the November CPI data comes on December 13.
“Powell’s comments were in line with the November post-policy press conference, Fed minutes and were relatively dovish as compared to few other Federal Reserve members’ views over the past two weeks. We continue to expect a 50 bps rate hike in mid-December 2022 FOMC meet and a terminal Fed Fund target rate in the band of 4.75-5%,” says Deepak Agrawal, Chief Investment Officer, Debt Fund, Kotak Mahindra Asset Management Company.
Powell acknowledges that inflation remains high and one good month (October) may not be the reason to stop raising rates – While October inflation data received so far showed a welcome surprise to the downside, these are a single month’s data, which followed upside surprises over the previous two months. It will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high.
Fed will remain adamant till inflation is brought well under its target of 2 per cent. Powell was clear about any Fed Pivot that the market may look forward to. This is what Powell had to say:
Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.
Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.
It is likely that restoring price stability will require holding policy at a restrictive level for some time.
History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.