Despite falling inflation, Federal Reserve Chairman Jerome Powell delivered aggressive views regarding monetary policy at the annual Jackson Hole Symposium on Friday, sending the stock market tumbling.
There was a 2.1% down for the Dow Industrial Average (DJIA -2.62%), a 2.5% dip for the S&P (SPX -2.91%), and a 3% drop for the Nasdaq Composite (COMP -3.43%).
The indices are set to lose ground after two consecutive days of gains.
Powell emphasized the Fed’s plan to limit inflation and economic growth via its monetary stance.
He pointed out the recent inflation data suggesting slower price growth is too tiny to convince the Fed to lighten up on its draconian policy.
Market expectations that the Federal Reserve would shift to a more restrictive policy and then stop were dashed by Chair Powell, according to Jeff Klingelhofer, co-head of investments at Thornburg Investment Management.
“The Fed won’t stop working until they have solid evidence that inflation is heading back near 2%.”
According to data published on Friday, the Fed’s preferred inflation indicator climbed 4.6% year over year in July, down from June’s 4.8% rise.
Even still, costs continued to climb on the previous Friday.
The yield on 2-year Treasuries, which is used to anticipate the future level of the fed funds rate, increased by about 2.4%, coming in just below the multi-year high it set in mid-June.
This suggests that investors are now being disappointed by the stock market.
The stock market has surged this summer, expecting that rate rises would be less frequent, so any signs that that expectation is being fulfilled would be welcomed.
The market expects the Federal Reserve to raise the funds rate by only half a percentage point in September after all three main indices have gained double digits in percentage terms from their mid-June lows for the year.
After sitting at about 45% for a few minutes before Powell spoke this morning, the fed funds futures market is now pricing in a 60% likelihood of a three-quarter point raise.
The bright side, though, is as follows.
For the next several months, the Fed may have to raise interest rates rapidly, but if inflation continues to fall, the Fed may moderate its rate hikes beyond that time.
As a result, the probability that the federal funds rate (the rate at which the Fed will cease raising) will increase to 4% remains below 50%.
James Camp, managing director of strategic income at Eagle Asset Management, stated, “The silent thing they’re [the Fed] not saying out loud is that those type of short-term rates would be incredibly punitive to risk markets.”
Powell would not completely rule out a modest hike of half a percentage point in September, saying the Fed will wait to see additional economic data before making a final decision.
According to Gerard MacDonell, an economist at 22V Research, “he rarely hammered the table” when it came to hardline language about raising interest rates.
The fact that the stock market isn’t plunging to a terrifying level now aligns with that glimmer of hope.
While it has been falling, the S&P 500 is still very close to 4,100, at which buyers have stepped in to push the index upward this summer.
Plus, it’s staying above its 50-day moving average, which suggests that buyers are still comfortable enough with the economy and market to pay a premium above recent lows.
Several stocks are showing gains on Friday.
The stock of Seagen SGEN -6.25% (ticker: SGEN) fell by 5% after it was reported that Merck MRK -1.05% (MRK) had halted acquisition discussions with the business, which had been valued at roughly $40 billion. Shares of Merck hardly moved.
A rumor that business software firm Everbridge (EVBG) is considering a sale to the likes of an industrial corporation or private equity group prompted a 14% increase in the stock price of Everbridge.
The Marvell Technology (MRVL) stock price dropped 8.3 percent as the data center semiconductor company predicted weak third-quarter revenues of around $1.56 billion, down from the $1.58 billion expected by the market.
After Citi analysts placed Sanofi (SNY) on a positive catalyst watch, the stock price increased by 1% on Friday in the hopes that the settlement in a dispute involving the medicine Zantac would be substantially less than the $20 billion predicted by the market.
The share price of First Solar (FSLR) didn’t change despite Bank of America upgrading the company to Buy from Neutral.
