The Dow Jones Industrial Average hit its highest level since mid-September on Wednesday, as bonds also rose. This followed comments by Federal Reserve Chair Jerome Powell, who indicated that the central bank may soon cut the rate at which it raises interest rates, even though it still intends to do so over the next few months.
Powell made this pledge in a lecture at the Brookings Institution in Washington, DC. The Fed has been gradually increasing interest rates since March. Yet, Powell suggested that the December Fed meeting might only see a rate increase of 50 basis points. This is less than the four straight rises of 75 basis points.
After the December meeting, Powell remarked, “the time to pause down the rate hikes could come.” He reasoned that rate hikes need time to impact the economy significantly.
Powell cautioned investors to pay closer attention to the Fed’s remaining work to reduce inflation. It is more crucial to know how much further we will need to raise rates to contain inflation and how long we will need to retain policy at a restrictive level, he said, given how far we’ve come in tightening policy.
Powell’s remarks’ timing is interesting because a lot of macroeconomic data is being released at the moment, and analysts and the public are split on whether or not a recession will occur in 2023. A report released this week indicated that housing values fell in September for the third consecutive month. As a result, the recent decline in mortgage rates has not yet stimulated buying activity. Payroll firm ADP said today that the private sector added 127,000 jobs in November, well below the 190,000 predicted by experts.
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Chair Jerome Powell – The NYSE and NASDAQ both post gains.
Powell’s comments were consistent with what the Fed has been saying for the past few weeks. Before the Open Market Committee meeting of the Federal Reserve scheduled to take place in two weeks, when bank officials cannot make any public statements, his address was one of the final opportunities to do so.
Inflation has reached its highest level since 1982, and it was made apparent that the Fed still has to hike rates several times to combat it. The Fed had to defend its decision to delay an interest rate increase.
In the wake of Powell’s remarks, the stock market in the United States rose. The 3.1% gain saw the S&P 500 reach a new all-time high, closing at 4,080.07 and surpassing its previous record set on September 12. The yield on a 10-year U.S. Treasury note dropped 5 basis points to 3.70 percent as bonds rose in price. (As the price of a bond rises, its yield decreases.)
Remember why you started this fight, as Powell puts it.
The U.S. economy grew considerably more slowly in 2022. However, Federal Reserve Chair Jerome Powell still claims there has been no “clear progress” in lowering prices despite this year’s rate hikes and recent inflation figures.
As he put it, “we can say that demand growth has slowed,” and “we expect it to be sluggish for a while.”
Even more so considering the continued tightness of the U.S. labor market. Powell stated that the Fed would continue to raise interest rates until that situation changed.
About the Fed’s long-term inflation target of 2%, he said that nominal wage growth has been “far above what would be consistent with 2% inflation over time” and that “in the labor market, the demand for employees is substantially higher than the supply of available workers.” As a result, “another thing we want is for the labor market’s supply and demand to rebalance themselves.”
Powell’s remarks came just two days before the November jobs data from the U.S. Department of Labor. The unemployment rate in the United States is expected to rise to 3.8% in November from 3.7% in October, while the addition of non-farm payrolls is forecasted to decelerate to 220,000 in November from 261,000 in October and 315,000 in September.
Hard landing or economic downturn?
On Wednesday, U.S. Treasury Secretary Janet Yellen addressed the New York Times Dealbook Summit attendees. She noted that policymakers continue to place a premium on monthly data on employment and inflation but expressed optimism that the Federal Reserve may still successfully lower inflation without triggering a recession.
However, other aspects of the economy are still deteriorating, leading many to fear that a recession is inevitable. One-sixth of the U.S. economy is based on the housing market, making it a crucial sector.
30-year fixed-rate mortgages hit 7.24% earlier this month after the Fed’s rate hikes. They have decreased since then, but not to the extent that the demand for mortgages has decreased. The number of people applying for house purchase loans and those looking to refinance their mortgages dropped by 86% and 41%, respectively, this week compared to the same week last year.
As of late, mortgage loan demand has been somewhat weak. For the past nine months, existing house sales in the United States have fallen, and prices have fallen by 2.6% over the past three months.
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