POWELL’S RATE COMMENTS UNLEASH WALL STREET RALLY
Wall Street closed out a solid November with a broad market rally Wednesday after Federal Reserve Chair Jerome Powell said the central bank could soon begin easing up on its aggressive interest rate increases aimed at taming inflation.
Powell, speaking at the Brookings Institution, reaffirmed that the central bank could begin moderating its pace of rate hikes as soon as December, when its policymaking committee is due to hold its next meeting.
“We have a risk management balance to strike,” Powell said. “And we think that slowing down [on rate hikes] at this point is a good way to balance the risks.”
Powell signaled that the Fed may increase its key interest rate by a half-point at its December meeting, a smaller boost after four straight three-quarter point hikes. Rate increases could then fall to a more traditional quarter-point size at its February and March meetings, based on previous Fed forecasts.
Powell said the Fed is seeking to increase its benchmark rate by enough to slow the economy, hiring, and wage growth, but not so much as to send the U.S. into recession.
It has lifted the rate six times this year to a range of 3.75% to 4%, the highest in 15 years. Those increases have sharply boosted mortgage rates, causing home sales to plunge, while also raising costs for most other consumer and business loans.
Stocks roared higher following Powell’s midafternoon remarks. The S&P 500 rose 3.1%, snapping a three-day losing streak.
The major indexes ended November with their second straight month of gains, though they remain in the red for the year.
Powell’s comments sent Treasury yields sharply lower. The yield on the 10-year Treasury dropped to 3.65% from 3.75% late Tuesday.
“Perhaps all that the market was looking for today was confirmation that we’re going to have a smaller rate hike in December,” said Kristina Hooper, chief global market strategist at Invesco.
Powell singled out strong hiring and wage gains as the main driver keeping services costs high. Paychecks, on average, have jumped about 5% in the past year, before inflation, the fastest pace in four decades.
“We want wages to go up strongly, but they’ve got to go up at a level that is consistent with 2% inflation over time,” Powell said. Wage growth at about 3.5% a year would fit that criteria, he said.
While citing some recent signs that inflation is cooling, Powell stressed that the Fed will push rates higher than previously expected to ensure inflation comes down sufficiently.
“History cautions strongly against prematurely loosening policy,” Powell said. “We will stay the course until the job is done.”
The path ahead, though, is far from certain.
“The only thing we know is that a smaller rate hike is likely in December,” Hooper said. “We have really very little in the way of visibility of when the pause is going to be.”