Fed Chair Jerome Powell Sticks To Disinflationary Script; S&P 500 Rises

Fed Chair Jerome Powell on Tuesday said that the economy was still improving, but the S&P 500 slipped.

Jerome Powell, the Federal Reserve chairperson, did not adopt a more hawkish stance in response to a surprising strong jobs report for January on Tuesday. After some volatile swings, the S&P 500 surged after Powell's speech.

Wall Street was alert to more hawkish comments after Friday's employment report showed that the country had gained a net of 517,000 new jobs, while the unemployment rate dropped to its lowest level in 53 years at 3.4%.

Raphael Bostic, Atlanta Fed president, said on Monday that the continued strength of the job market could force policymakers to raise rates further than expected.

Powell did not go that far but he said that "it could be that we need to do more" if the economic data continue to be stronger than expected.

Bill Adams, chief economist at Comerica Bank, wrote that the January jobs data did not change Powell's message. He added that the jobs data likely overstated labor market strength, citing an increase in layoffs announced in January.

Powell stated that "financial circumstances have tightened considerably" in response the latest jobs report. Powell is more or less satisfied with the current market prices.

The Fed Chair did mention that both the war in Ukraine as well as China's economic recovery present some risk for higher than expected inflation.

The markets now price in 100% odds of the Fed hiking a quarter point on March 22, and 76% odds of the Fed hiking another quarter-point May 3. The markets now price in 100% odds that the Fed will hike a quarter-point on March 22 and 76% odds that the Fed will hike another quarter-point on May 3.

Wall Street now sees a 40% chance that the Fed must make an additional rate increase, up from just 3.6% a week earlier.

The markets believe that there is a 50% chance of the Fed reducing its key rate by year-end to 4.75%-5.0%.

Powell's comments on Tuesday did not significantly change that outlook. Powell's remarks last Wednesday prompted the S&P 500 to surge, signaling that "the deflationary processes has begun."

Powell stated on Tuesday that disinflation will take some time. He noted that inflation has not yet been brought down for core services excluding housing.

Powell noted that the labor shortage has been alleviated by a recent increase in immigration following a steep slowdown during the pandemic.

The S&P 500 gained 1.3% after Powell's speech, and was near its session highs, following some large swings during the afternoon. The Dow Jones Industrial Average rose 0.8% while the Nasdaq Composite jumped 1.9%.

The S&P 500 recovered its footing Tuesday after a shaky start to the week, which was triggered by the shock of the job report. The blue-chip index has held above the 4100 key level, which it struggled to pass before surging after Powell spoke on Thursday.

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The yield on the 10-year Treasury initially fell, but then rose by 4 basis points.

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