A softer dovish message from Federal Reserve Chairman Jerome Powell will further bolster hopes for a slowdown in rate hikes and a smooth economic landing, which have fueled a strong recovery in US equities.
Since the beginning of the year, stocks and other risky assets have gained in price amid expectations of lower inflation and a slowdown in raising interest rates by the Fed.
Many traders and investors nonetheless believe that a recession is likely to hit the markets again sometime this year. Bull traders breathed a sigh of relief after Powell’s speech on Wednesday when he noted progress in the fight against inflation and did not want to resist the rally in stocks and bonds.
On Wednesday, the S&P 500 added more than 1% and is up more than 7% for the year. The benchmark 10-year U.S. Treasury yield, which moves inversely with prices, tumbled after the meeting and is down more than 40 basis points in 2023.
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However, Powell provided little information that the Fed will slow down its hawkish policy after it announced a 25 basis point rate hike. He said that, most likely, there are several more rate hikes ahead.
However, the market is encouraged by the lack of hawkish resistance to the risk asset rally, which could make it difficult to contain inflation. Also, Powell’s references to disinflation – a fall in the inflation rate – were well received by traders and investors.
The monthly rate was negative in December when consumer prices were 0.1% lower than in November. This was the first drop since May 2020.
At the same time, many investors were skeptical that politicians could bring down the highest inflation in decades without hurting the economy.
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