Fed Chief Jerome Powell Stays Hawkish, But S&P 500 Rallies

Though Fed chief Jerome Powell reaffirmed that rates are headed to 5%, the S&P 500 rose upon release of his remarks.

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May 14, 2023 • 3 min read

In his first public comments since his hawkish press conference following the 75-basis point rate hike last month, Federal Reserve chair Jerome Powell didn't budge from his belief that the Fed’s key policy interest rate will reach 5%. Powell's prepared remarks were released and the S&P 500 soared.

Powell's hawkish message had won the bond market despite the CPI reading that was lower than expected on Nov. 10, and the subsequent signs of a softening economy. Fed funds futures prices indicated that, ahead of Powell's remarks on Wednesday (and double what they were a month earlier), the policy rate would reach a range between 5% and 5.25% at the June meeting.

CME Group's FedWatch site reports that after Powell's remarks, the odds of a peak rate between 5% and 5.25% fell to around 55%. The odds of a 75 basis-point increase on December 14 dropped from 34% to 25% a day earlier.

Powell's message was largely the same as it was on Nov. 2. He said that it appears "likely" that the final level of interest rates will be higher than anticipated at the September meeting.

In September, the quarterly projections showed that the federal funds rate would rise to 4.6%. This implies a target range between 4.5% and 4.75%. Powell's belief that the highest rate will be greater suggests a range between 4.75% and 5% as a minimum. After the Fed's early November meeting, Powell made similar remarks about peak rates.

Powell said that the rate increases may slow down in December. Powell reiterated that it is less important how fast rates are rising than how long they remain high.

In another reference to the chronic inflation in the 1970s the Fed chair said that history warns the Fed against letting down its guard too soon.

Powell emphasized the importance of the CPI report for October, while noting that the readings in the two preceding months were higher than expected. It will take substantial more evidence to convince us that inflation has actually declined.

Powell focused his attention on the core PCE price index. He said that it is the best indicator of the direction in which inflation will be heading. Core PCE inflation has been a little up and down, but has not shown much progress since December.

The October PCE data will be published on Thursday.

Powell stated that the rate of inflation for new leases for renters had "sharply declined." He said that once the majority of leases come up for renewal in 2023, housing inflation measures should start to drop.

Powell also highlighted another area that should be of concern to policymakers: the core services inflation, excluding housing. This accounts for over 50% of the PCE core price index. It includes categories like health care, education and haircuts.

Powell stated that this category may be most important for understanding future core inflation, as price changes are closely linked to wage growth. He said that the labor market is key to this inflation category.

Powell said that the "job growth" is still far above what's needed to keep pace with population growth.

On Wednesday, the Labor Department announced that the number job openings had dropped to 10,3 million from almost 10.7 million in the previous month. It's still 4.3 million jobs more than the number of unemployed people.

Bottom line: We have a way to go before we can restore price stability.

After Powell's remarks were released at 1:30 pm ET, the S&P 500 reversed higher. It soared 3.1% to top its 200-day moving average. The S&P 500 reversed upwards, gaining 3.1% and topping its 200-day average. Dow Jones gained 2,2%, reaching a new seven-month high. The Nasdaq composite soared 4.4%.

The S&P 500 is down 17.5% since its record closing high of Jan. 3 while the Dow has only fallen 8%. The Nasdaq, however, remains 31.6% under its record closing.