Fed Chair Jerome Powell spoke harshly on Wednesday, promising more rate hikes in the relentless fight against inflation, but he also dropped a few comments dovish enough to send the stock market sharply higher. The Federal Reserve raised interest rates by a quarter point on Wednesday afternoon, as expected, and in its statement maintained its comment that it expects more rate hikes. Stocks fell first and bond yields, which move inversely to bond prices, rose. .SPX 1D stocks Powell spoke at a news conference afterwards, warning the market against further rate hikes and a tough stance on inflation. But traders seemed to be picking out comments that had a dovish bias and the stock market reversed course and rallied strongly. Bond yields fell. Powell said the Fed’s work is not done, but it is “gratifying to see that the disinflation process is underway, with a continued strong labor market.” “The markets are on their way to the races. You read this as reticent. I think it was ‘satisfactory’ and ‘disinflation’ were two words the market brought to town,” said Diane Swonk, chief economist at KPMG. “The problem, from the Fed’s perspective, is that they’re not done yet. He stuck to his guns, but the market took ‘satisfied’ and ‘disinflation’ and ran with it.” Swonk said markets heeded those words, though Powell warned the Fed was concerned the slowdown would worsen of inflation could reverse. “It was hawkish humility because he’s clearly humbled by the slowdown in inflation, but he’s also not deviating from his view and the Fed’s view that it will take time,” Swonk said. Powell also said he expects the Fed could hit its 2% inflation target without much economic deterioration. “I actually thought he did a pretty good job. It was kind of a hawk in the beginning,” said James Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management. Then “he just said we’re talking about a few more raises and I think that’s what the market is responding to. A pair is generally two. That could be a hike in March and maybe another one in May.” The Fed’s rate hike on Wednesday brought the Fed funds’ target rate range to 4.50% to 4.75%. The Fed has targeted a 5% to 5.25% range as the final rate or end point. Caron said the market seemed comfortable at that level and rallied when Powell’s comment of “a few more hikes” suggested the Fed might stop there. “For the markets, it’s like, ‘So you tell us that!'” Karon said. The S&P 500 jumped above 4,100 in the Powell-fueled rally. This is a key level that strategists have been watching because it was the December high. At the same time, bond yields eased, with the 10-year government bond yield falling to 3.4% from just under 3.5% earlier in the day. .SPX 1Y line stock Michael Schumacher, head of macro strategy at Wells Fargo, said Powell’s overall tone is dovish, although he is delivering a hawkish message. “The explanation was fine. She had the reaction he wanted, and yet he came out of the press conference and threw out his comments about not wanting to over-tighten,” he said. “People got really excited when he said that.” Strategists had expected Powell to do whatever it takes to sound hawkish because the Fed doesn’t want to create easier financial conditions. Shares traded higher as investors continue to anticipate a soft landing, a fall in inflation and eventually a rate cut by the Fed. One risk is that easier financial conditions, reflected in stock and credit rallies, could lead to even more inflation. US10Y 3M line 10 yr The futures market on Wednesday afternoon started pricing in a lower interest rate by year-end, meaning greater chances of a rate cut. BMO rates strategist Ben Jeffery said fed funds futures are closing at 4.89% in the December contract, down from 4.92% on Tuesday. “I think the bar for him being hawkish was very, very high. The market was ready for anything he said that could potentially be construed as dovish,” Jeffery said. “That’s all everyone was looking for and that’s what it turned out to be.” Jeffery said the Fed could also have signaled that it would no longer hike rates by more than a quarter point. In its statement, the Fed swapped the word “pace” for “magnitude” of future rate hikes when describing what it would consider when deciding on further rate hikes. “For me, they go from how fast to how high,” he said. He said that means the Fed is focusing on how many more rate hikes, rather than how big.
