Wall Street had widely expected that the Federal Reserve would ease up on its pace of rate hikes to battle inflation on Wednesday, Feb. 1. But despite the central bank’s efforts to emphasize that it wasn’t going to stop hiking any time soon, markets rallied after traders decided that the finish line was in sight.
The unanimous decision to raise the benchmark rate target by 25 basis points followed a 50 basis-point hike in December where the same language — “ongoing increases in the target range will be appropriate” — had been used. In his news conference, chair Jerome Powell tried to hammer home the point that policy would stay restrictive “for quite some time.”
But traders who had been looking for some sign that the Fed might take a breather took heart from Powell comments that this meant “a couple of more rate hikes.” U.S. equity indexes, which had gyrated, took off once Powell began speaking. Treasury yields fell and swap contracts implied that the June peak in the Fed’s policy rate would remain below 5%.
“Markets seemed to be shrugging off the Fed’s tough talk, and celebrating that the rate hikes are smaller and the end is in sight given that inflationary pressures seem to be abating,” said Jane Edmondson, co-founder of EQM Indexes. “Still room for a soft landing that avoids a recession. I think the fact that the job market and corporate earnings have survived all these rate hikes is a testimony to underlying strength of the economy.”
Here’s what others on Wall Street had to say:
Quincy Krosby, chief global strategist for LPL Financial: “Powell’s comments, so far, have been more reassuring to the market in that he’s acknowledged that they can possibly reach price stability without harming the labor market to get there. Moreover, he’s laid out a clear roadmap for what the Fed is increasingly focused on, that is, disinflation to reach services.
“It isn’t surprising that his comments regarding the labor market helped push markets into the green, because rhetoric had focused on the need to bring inflation back toward 2% even if it meant having unemployment climb higher to get there.”
Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors: “The statement was neutral due to two offsetting factors. The reference to ongoing rate increases validates two more rate hikes, but that was offset by the statement that inflation has eased somewhat.”
JoAnne Feeney, partner at Advisors Capital Management: “No surprise from the Fed today as it clearly signaled its commitment to continue to raise rates until inflation is confirmed to be on its way to its 2% target. Investors, however, recognize that the headwinds from rate increases last year will diminish sharply and so pose less of a problem for valuations. It remains time to be highly selective because some areas of the economy will contract further, while others continue to grow.”
Win Thin, global head of currency strategy at Brown Brothers Harriman & Co.: “The Fed lost a chance to really reset market expectations and instead, markets are doubling down. U.S. financial conditions continue to loosen.”
Omair Sharif, president and founder of Inflation Insights: “Not sure I get this obsession with a ‘couple’ of more rate hikes as being dovish. I thought it was dovish after I read the statement! The change in the inflation language in the statement combined with the change in the language from ‘pace’ to ‘extent’ suggested that they were debating when to pause and indicated that 5.1%, which was the median dot for 2023 in the December SEP, was the ceiling, barring any big changes in the data.”
Bill Zox, portfolio manager at Brandywine Global: “I see no signs yet that the Fed is open to 2023 rate cuts. I’m not sure the Fed is even trying for a soft landing. While they would never say so, they might prefer the restorative aspects of a recession and a proper bear market.”
Neil Dutta, head of U.S. economic research at Renaissance Macro Research LLC: “Powell has said that financial conditions have tightened considerably despite the fact that they have eased considerably. The fact that he has said this is dovish in its own right. He mentioned the risk of over tightening and played up the encouraging news on inflation of late. The odds are increasing that the Fed is declaring victory too soon. The Fed’s flirtation with the soft landing today increases the risk of a harder landing later.”