Deeper dive: Why did markets rally after Powell’s presser?

Drew Angerer

“We’re not confident that we haven’t, but we’re not confident that we have.” That statement can sum up the entirety of Fed Chair Jay Powell’s press conference on Wednesday, which outlined that the central bank is still not sure whether it is done with a hiking cycle to “sufficiently bring down inflation to 2% over time.” Stocks still jumped despite a lack of confidence from the Fed about “achieving such a stance,” while bond yields fell back despite an FOMC that continues to “proceed carefully.” At the time of writing, S&P 500 futures (SPX) are up another 0.5%, while the yield on the 10-year Treasury is down 8 bps to 3.71%.

Between the lines: In its last set of economic projections, the Fed implied one more hike for the remainder of 2023. While Powell tried to distance himself from any conclusions drawn from that dot plot, the fact that it’s now being called into question signals a more dovish turn for the central bank, charging up investor hopes that the hiking cycle is over. Wednesday’s decision to hold rates in a range of 5.25%-5.50% also resulted in the FOMC skipping a rate hike for two consecutive meetings, marking the longest period without an increase since the Fed began its aggressive hiking cycle in March 2022. There was additional good news for the economy, with Powell explaining why a recession is no longer indicative in the near term and why recent strong-than-expected data is not problematic.

“I think everyone has been very gratified to see that we’ve been able to achieve, you know, pretty significant progress on inflation without seeing the kind of increase in unemployment that has been very typical of rate-hiking cycles like this one. That’s a historically unusual and very welcome result, and the same is true of growth.”

More explanation: “There are really two processes at work here,” Powell added. “One of which is the unwinding of the distortions to both supply and demand from the pandemic and the response to the pandemic, and the other is restrictive monetary policy, which is moderating demand and giving the supply side time and space to recover. A significant increase in the size of the labor market now, both from labor-force participation and from immigration, that’s a big supply-side gain that is really helping the economy. And it’s part of why GDP is so high, because we’re getting that supply. So we welcome that. But I think those things will run their course, and we’re probably still going to be left with some ground to cover to get back to full price stability. And that’s where monetary policy and what we do with demand is still going to be important.”