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Thursday, July 28, 2022
Today's newsletter is by Myles Udland, senior markets editor at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn.
Stocks moved in one direction on Wednesday — higher.
When the closing bell rang, the Nasdaq was up over 4%, the S&P 500 had risen 2.6%, and the Dow was up 1.4%. This marked the Nasdaq's biggest rally since November 2020.
Including Wednesday's surge, the S&P 500 has gained more than 1% after each of the Fed's last four meetings, all of which have included interest rate hikes from the central bank.
And since hitting its most recent low on June 16, the S&P 500 is now up 10%.
What ultimately moved markets on Wednesday was, as always, expectations. Specifically: expectations that the most aggressive of the Fed's actions to raise interest rates may now be behind us.
"Chair Powell bolstered expectations of a policy pivot at his July FOMC press conference," said Neil Dutta, head of economics at Renaissance Macro. "He noted that it is 'likely appropriate to slow [rate] increases at some point.' Importantly, the rising uncertainty in the economic outlook has pushed the Fed away from explicit forward guidance to data dependence. Financial markets have responded in kind."
On Wednesday, the Federal Reserve voted to raise its benchmark interest rate by 0.75%, the second-straight meeting the central bank made a move of this magnitude. In Powell's outline, these aggressive moves are targeted solely at bringing down inflation.
"From the standpoint of our Congressional mandate to promote maximum employment and price stability, the current picture is plain to see: The labor market is extremely tight, and inflation is much too high," Powell said.
The Fed hasn't raised interest rates by this magnitude in consecutive meetings since the early '80s. Inflation in June stood at 9.1%, the highest since 1981.
In both its policy statement and comments during Powell's press conference on Wednesday, investors and economists saw the outline of a central bank set to ease off the gas pedal in the coming months.
This is a welcome development for investors.
"The Chairman’s press conference was very clear in recognizing an economy that shows some indications of slowing," said Rick Rieder, BlackRock’s CIO of global fixed income. "We have often said that 'high prices are the cure for high prices,' and indeed we are watching that dynamic play out loud and clear across the country today."