By David Randall and Lewis Krauskopf
Investors seeking justification for breathtaking rallies in stocks and bonds are finding hope in the words of Federal Reserve Chair Jerome Powell, even as the central bank insists the fight against inflation has a long way to go.
Signs of easing inflation have ignited bets that the Fed will begin loosening its restrictive monetary policy earlier than expected, driving the S&P 500 to its biggest monthly gain for more than a year in November. Yields on the US benchmark 10-year Treasury which move inversely to prices, saw their steepest decline in more than a decade.
Some investors believe Powell may have signaled an incremental shift to a more dovish outlook on Friday, when he said the risks of moving too far with interest rate hikes have become “more balanced” with those of not moving high enough to control inflation.
The S&P 500 climbed nearly 0.7 percent and was on pace to finish at its highest closing level of the year after the comments – which were made ahead of a quiet period before the Fed’s Dec. 12-13 monetary policy meeting. Two-year Treasuries which are sensitive to interest rate expectations, fell nearly 15 basis points to their lowest level since June.
The Fed chair reiterated that the fight against inflation was far from finished and said the central bank was ready to further tighten monetary policy if necessary.
“He provided balanced comments, both dovish and hawkish, and the markets are very much ignoring the hawkish comments and grabbing onto the dovish comments that the Fed is essentially done,” said Paul Nolte, senior wealth advisor and market strategist at Murphy & Sylvest Wealth Management.
Evidence of slowing inflation has piled up in recent weeks. On Thursday, data showed that the Fed’s preferred inflation measure, the core PCE price index, eased in October, complementing other reports indicating cooling consumer prices and softer economic activity.
Trader bets on Fed rate cuts starting in the first half of 2024 gained steam this week after Fed Governor Christopher Waller, an influential and usually hawkish policymaker, suggested rates cuts by then could be needed to keep policy from becoming overly restrictive in the face of easing inflation.
Federal funds futures, a widely used security for hedging short-term interest rate risk, imply a Fed funds rate of 4.533 percent by the end of July, versus 5.121 percent expected three months ago for that period, according to LSEG data. – Reuters
