Today’s Fed meeting report reiterated policymakers’ plan for “continuing increases” in the U.S. central bank’s key interest rate. Word indicated two additional hikes were possible as the Federal Reserve’s rate-setting committee announced a quarter-point move. The S&P 500 held its ground, then rose further and gained steam after Fed Chairman Jerome Powell spoke.
His press conference at 2.30 pm. Powell sounded only slightly less hawkish than before, but he sounded more upbeat about the prospects for a soft landing in the US economy.
He said the deflationary process had begun, but inflation was “very high”.
“We’ll stay in the study until the job is done.”
“The labor market continues to be out of balance,” Powell said. He noted that wage growth is “slowing down a bit” but remains at “very high levels”.
However, he said it was pleasing to see inflation without a major weakness in the labor market. “I think there’s still a way to go” to reduce inflation without a major economic collapse.
Powell talks about risk management
Powell did not rule out the possibility that incoming inflation and wage data, if they are benign, could lead the Fed to hike less. However, he explained that the central bank should think about managing risk.
“It’s very difficult to manage the risk of doing too little,” which could lead to stabilization of inflation, he said.
“We have no desire and no incentive to overtighten.” But he said the central bank has the tools to support growth if needed.
March Fed Meeting Expectations
After the Fed meeting, markets are still betting that the central bank will hold off on rate hikes until after next month, with the key overnight lending rate at 4.75% to 5%. That’s below the 5%-5.25% range Fed policymakers predicted in December.
Investors’ hopes for a quick end to rate hikes grew after relatively subdued wage-growth data released on Tuesday. As of Wednesday afternoon, markets were pricing in 13% odds that today’s price hike would be the last, according to CME Group. FedWatch page.
The odds of additional hikes in both March and May are 39%.
Jobs, salary details are important
On Tuesday morning, the Labor Department’s employment cost index showed that compensation costs rose 1% in Q4. Expected 1.1%. However, compensation rose 5.1% from a year ago, a slight uptick from the 5% growth in Q3.
Economists focus closely on wage growth for private-sector workers, excluding wage-earning industries, as a good indicator of underlying wage growth. In Q4, wages in this segment increased by 0.9%, or a 3.6% annualized pace. That measure excludes industries where wages are driven by commissions, which can be more affected by cyclical highs and lows. The ECI report has raised the central bank’s emphasis on the need for lower wage growth to bring inflation back to the 2% target. Powell has said that reducing wage growth to 3.5% is sufficient.
Still, after better news on wage growth, today’s Labor Department report showed that job openings unexpectedly rose by 572,000 in December to just 11 million.
Powell has repeatedly cited a surplus of job opportunities relative to unemployed workers as a key reason for unusually strong wage growth. In December, the employment rate for unemployed workers rose to 1.9 from 1.7, well above the pre-Covid peak.
With both consumer spending and manufacturing showing signs of weakness, Friday’s January jobs report will provide further evidence of whether the economy’s last major source of strength is giving way. Analysts had expected a firm gain of 185,000 jobs, but average hourly wage growth to slow to 4.4% from 4.6% in December.
S&P 500 setup
Wednesday afternoon Stock market activity, the S&P 500 rose 1.1%, trading lower before the end of the central bank meeting. That follows Tuesday’s 1.5% gain for the S&P 500 after controlling for ECI data. By Tuesday’s close, the S&P 500 had its Oct. That was 14% higher than 12 peer-market close lows, but 15% off its all-time low.
The S&P 500 hit 4,094 on Friday, surpassing 4,100 since early December. That is the main point to watch now. On Tuesday, the S&P 500 closed at 4076.60, the highest of the day. With Wednesday’s rally, the S&P 500 broke out of its trading range and crossed 4120.
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As stocks rallied, so did U.S. government bonds. The 10-year Treasury yield fell 13 basis points to 3.4%, a four-month low.
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