Fed Chair Jerome Powell believes we can avoid a recession as he strikes a new bullish tone
The stock market rose on Wednesday after Federal Reserve Chair Jerome Powell said inflation was coming down and he believes the US will avoid a recession this year.
“We can now say for the first time that the disinflationary process has begun,” he told reporters, adding that he expects US economic growth to be positive this year, albeit falling to a “muted pace”.
Fed officials are usually careful never to make big, explicit recession predictions, but Chair Powell’s previous press briefings have often included words intended to dampen investor enthusiasm and dampen expectations – in a famous example, he warned the Fed was ready to ” to bring some pain”. to households and businesses. But this time it was different.
Although the Fed hiked rates by 25 basis points on Wednesday, marking the eighth rate hike in less than a year, Yung-Yu Ma, BMO Wealth Management’s chief investment strategist, said said the Fed chair’s statements show that “the peak of hawkishness” is behind us and “the ingredients for a soft landing are in the making.”
“Chairman Powell showed his last cards and indicated that he believes there is a way to bring inflation down to 2% without a significant economic slowdown or a significant rise in unemployment,” Ma said wealth.
And Charlie Ripley, senior investment strategist at Allianz Investment Management, argued that Powell’s comments were evidence that the end of rate hikes was “on the horizon.”
“Slowing the pace of rate hikes is a clear sign that the Fed is getting comfortable with the idea that policy-mandated policies are finally starting to work for the economy,” he said Wealth.
The S&P 500 closed up more than 1% Wednesday after Powell’s speech, while the tech-heavy Nasdaq rose 2%. The euro also rose against the US dollar, a sign that investors viewed Powell’s comments as dovish.
David Keller, chief market strategist at Stockcharts.com, a technical analysis platform, said wealth that stock market investors took Powell’s comments as confirmation that Fed rate hikes were “starting to have a real impact on inflation,” leading many to price in a “non-recession soft landing.”
Despite his optimistic tone, Powell said further rate hikes were still appropriate, with the Fed’s interest rate likely to peak between 5.00% and 5.25% this year. And he added that he doesn’t expect to cut rates this year as year-on-year inflation is still “running very hot.”
“It would be very premature to announce victory or to believe that we really did it,” he said.
“We’ve hiked rates by four and a half percentage points, and we’re talking about a few more rate hikes to get to what we think is appropriately hawkish levels.”
But despite Powell’s careful hedging, some investors were feeling optimistic. Jay Hatfield, CEO of Infrastructure Capital Advisors, said wealth that he expects the Fed chair to halt rate hikes this year as inflation eases faster than expected — and that will push stocks higher.
“We continue to expect the S&P to end the year above 4,500 as the Fed suspended rate hikes after the May meeting and the economy is proving resilient on post-pandemic tailwinds,” said he.
However, not everyone took Powell’s relatively positive performance at the press conference to heart. Ronald Temple, chief markets strategist at Lazard, warned that investor reaction to Powell’s speech could be overly optimistic.
“I think markets remain too dovish about how high interest rates will go and how long they will stay there. The more markets resist the Fed, the tighter conditions need to be to tame inflation,” he said Wealth.
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