Finance
Jerome Powell offered the markets a reprieve. It disappeared in an instant
(Bloomberg) — Wall Street traders cheered Wednesday as Federal Reserve Chairman Jerome Powell said he saw no interest rate hikes coming despite inflation pressures. The party didn’t last long.
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For a brief period, US stocks staged their biggest post-policy meeting rally since December, while Treasury yields fell more than 10 basis points across maturities. The relief trade got underway when Powell told reporters that “the next rate hike is unlikely to be a rate hike.”
The problem is that Powell has also not explicitly indicated that a rate cut is on the way this year, and it will likely take longer for central bankers to gain enough confidence in the downward trajectory of inflation to consider easing policies. That reality check caused an abrupt reversal in shares, which ended the day lower. Government bond yields have pared some of the decline, with the policy-sensitive two-year yield remaining below the 5% threshold – but not by much.
“Powell made it clear that the threshold for rate hikes is incredibly high,” said Michael de Pass, global head of interest rate trading at Citadel Securities. “They ultimately view the tariff level as restrictive, there is no denying that. Are they restrictive enough and how long will it take to penetrate the economy are now the questions.”
The fact that the market reacted at all to the idea that rate hikes are likely off the table shows how much sentiment has changed since the beginning of the year, when the consensus called for multiple rate cuts and an expected steady downward trend in inflation. There were few predictions for higher interest rates.
Lately, however, investors – especially in the Treasury world – have had reason to worry about a potentially aggressive Fed change as the US economy has remained resilient, job growth has been strong and inflation has proven harder to control. Bond traders cut the outlook for rate cuts in early January from six quarter points to just over one.
An April sell-off in stocks and bonds that sent two-year Treasury yields down more than 5% and sent the S&P 500 Index tumbling to its biggest monthly loss since October illustrates the tension building ahead of the Federal Reserve meeting. This week’s Open Market Committee. And potentially crucial data is still in place: Friday’s April jobs report is expected to show robust job growth, while more inflation reports will follow in the coming weeks. Central bankers will have to weigh everything.
“The FOMC appeared intent on not letting the market deviate too far from its base case of solid growth, persistent inflation and the intention to cut spending later this year,” Citigroup Inc. strategists wrote. led by Stuart Kaiser in a note, referring to the policy. establishing the Federal Open Market Committee. “The result was a big day of trading there and back.”
The stakes for investors were highlighted by Powell when he said that while he believes current interest rate policy “is restrictive, and we believe it will be sufficiently restrictive over time,” this will be “a question that the data will have to answer.” ”
While Powell acknowledged the lack of recent progress toward the Fed’s 2% inflation target this year, his signal that cuts are more likely than increases was enough to calm the market, at least initially. Whether this justifies a sustained stock rally is another matter.
What Bloomberg Strategists Say…
“Powell: Rate cuts before the end of the year are still on the table. Takeaway: Interest rates are capped, but the Fed will ease if the unemployment rate rises much further. The Fed has a dovish bias.”
— Edward Harrison, Markets Live blog contributor
“I was more surprised when I tried to figure out what Powell said to send the stock soaring,” said Steve Sosnick, chief strategist at Interactive Brokers. “Sure, he said no rate hikes are needed and downplayed fears of stagflation, but that wasn’t worth a big speculative rally.”
As for the longevity of the latest rally in bond support, Citadel’s de Pass warned that while the rebound is “logical,” the market was nearing its limits.
“The situation is already exhausted now that the market is far from the bottom of yields,” he said. “The market is probably struggling to function much more as we are in a situation of data dependency.”
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