Powell Doesn't Rock The Boat

By Nicholas Jasinski |  Wednesday, November 30 A New Bull? Today's main event was a speech by the Federal Reserve's Jerome Powell at the Brookings Institution—two weeks before the central bank's next policy decision. In short, the chairman emphasized that interest rates will rise further, albeit at a slower pace, and that they'll need to remain elevated for some time to bring inflation down. It wasn't a particularly new message, and stocks shot higher after Powell's speech to reverse their losses over the past two days. The S&P 500 closed up 3.1%, the Dow Jones Industrial Average added 2.2%, and the Nasdaq Composite surged 4.4%. All three are now in the green for the week, and the Dow is 20% higher than its Sept. 30 low, the technical definition of a new bull market. Futures market pricing implies close-to 75% odds of a 0.5 percentage point increase in the fed-funds rate on Dec. 14, up a bit from yesterday but about even with a week ago. The remaining odds imply a 0.75 point hike. "It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down," Powell said this afternoon. "The time for moderating the pace of rate increases may come as soon as the December meeting."  Powell's remarks didn't rock the boat as far as the market's December-meeting expectations are concerned, and stocks rallied. But a closer parsing of his remarks shows that investors are still fighting the Fed. Here's Stephen Stanley, chief economist at Amherst Pierpont Securities, writing today: In my view, the overarching theme is a hawkish one.  Powell laid out a case that the labor market is still too hot, that economic growth will need to remain below trend for “a sustained period,” and that inflation is likely to remain stubbornly high for a while.  As a result, Powell predicted that “it is likely that restoring price stability will require holding policy at a restrictive level for some time.”   This is the remaining area of tension between the FOMC and the markets in terms of policy expectations. Economists, fed-funds futures, and Fed officials all largely agree that the policy rate is likely to peak in the neighborhood of 5%. The divergence is that market participants are still sticking with the “Fed pivot” concept that the Fed will begin easing shortly after halting their hikes.  Futures pricing implies meaningful cuts in the fed-funds rate in the second half of 2023, contrary to Fed officials' stated plans. Powell emphasized—not for the first time today—that the central bank will lean toward over-tightening to quash inflation, rather than easing too early in a recession. “History cautions strongly against prematurely loosening policy," he said. "We will stay the course until the job is done.” It seems that Powell will need to keep repeating himself for the market to take his message seriously. DJIA: +2.18% to 34,589.77 S&P 500: +3.09% to 4,080.11 Nasdaq: +4.41% to 11,468.00 The Hot Stock: Estee Lauder Companies +9.7% The Biggest Loser: NetApp -5.8%  Best Sector: Technology +5.0% Worst Sector: Energy +0.5%