What Fed Chair Powell Can Say to Continue Stock Market Rally — Or Kill It

Whatever Federal Reserve Chairman Jerome Powell says when he takes the floor on Wednesday will have ramifications for financial markets.

So what do equity investors need to hear from the Fed chairman to keep the rally going? Market strategists who spoke to MarketWatch have a few thoughts.

Above all, anything Powell says to tighten expectations for a 50-basis-point rate hike in December is likely to push stocks and bonds higher, said Jake Jolly, chief investment strategist at BNY Mellon. As prices rise, bond yields fall and vice versa.

On the other hand, anything that gives investors the impression that another jumbo rate hike in December remains likely could backfire.

“How much will be the most critical [Powell] telling us about December,” said Jolly.

“If Chairman Powell is relatively quiet and doesn’t want to discuss his thoughts, that might be a hawk for me,” Jolly said. “That means it will remain a very data-driven decision.”

“Markets like certainty, they don’t like wait and see,” he said.

Read: Another jumbo Fed rate hike is expected this week — and then life gets tough for Powell

Powell and his fellow policymakers are expected to introduce a fourth straight hike of 75 basis points, or 0.75 percentage points, after they wrap up their two-day meeting on Wednesday. Investors focused on the prospect of the December meeting.

Derek Tang, an economist at Monetary Policy Analytics in Washington, D.C., told MarketWatch that any sign that Powell is keeping the possibility of another 75 basis point rate hike in December and a rate hike in the first or second quarter of next year would likely “really hit.” stocks” and led to a resumption of this year’s stock selloff that sent the S&P 500 SPX
Dow Jones Industrial Average DJIA,
and Nasdaq Composite COMP,
to a bear market.

Even if Powell signals that the Fed will almost certainly slow the pace of rate hikes starting in December, the interim period will still be fraught with event risk for stocks.

Investors will receive two months of inflation data between the end of the Fed’s two-day November policy meeting on Wednesday and the start of its December meeting on December 14. There is also the matter of mid-term elections in the United States. Nov. 8, as well as the possibility that expectations for 2023 corporate earnings may begin to weaken, as Morgan Stanley’s Michael Wilson has repeatedly pointed out.

If Powell really wants to convince investors that the Fed intends to slow the pace of rate hikes to give the economy and markets more time to adjust, he will have to find a way to do so while saying that fighting inflation remains central. bank priority.

“Chairman Powell will need to convince both traders and investors that the Fed is still determined to reduce inflation, but that it can be done with a steady dose of low interest rates,” said Quincy Krosby, chief global strategist at LPL Financial.

To see: Dow Heads To October Record As Big Tech Tanks: What’s Next For Stocks As Investors Await Fed Clues

As always, the stakes will be concentrated in Powell’s question-and-answer session, which is not as tightly structured as his opening statement. Maybe Powell misspoke or said something that misleads investors.

“There’s the carefully planned statement, then there’s the Q&A, where it’s easier to make mistakes and there’s a bigger margin of error,” Tang said at Monetary Policy Analytics.

Market strategists said the Fed had some progress to report even as inflation continued to approach its fastest pace in 40 years.

Core prices, which strip out volatile food and energy prices, accelerated more slowly in September than the previous month, according to the latest reading of the personal consumption expenditure price index released on Friday.

However, on an annual basis, they still rose by 5.1% last month, compared with 4.9% in August.

But on a brighter note, wage growth slowed in the third quarter, according to Friday’s reading of the employment cost index. Wages rose 1.2% last quarter, following a 1.3% increase in the quarter ended in June.

Powell could use the slowdown in wage growth to justify slowing the pace of rate hikes, market strategists said.

Expectations for the size of the Fed’s December hike have shifted after an Oct. 21 report in The Wall Street Journal said policymakers were moving toward a 75 basis point hike in November but were open to discussing the size of the December hike.

But the Fed’s messages so far have left plenty of room for doubt, and that has been reflected in interest rate futures markets.

According to CME’s FedWatch tool, Fed funds futures traders are pricing in a 44.6% chance of a 50-point hike in December, and a 49.5% chance of a 75-point hike.

This suggests that investors are waiting for Powell to confirm that a downward slide is indeed happening. After being burned repeatedly over the past year, including in August in Jackson Hole, Wyo., when Powell took the stock by storm with a brief and unexpectedly hawkish speech, it’s no wonder some investors remain skeptical.

According to estimates by Deutsche Bank strategists, the Fed has rigged markets in anticipation of a policy reversal about half of the time over the past year.

Jolly noted that while stocks have tended to rise on Fed decision days this year (with the central bank’s September meeting providing a notable exception), markets have tended to be volatile in the days following the meeting.

Any help given to stocks by Powell’s statement could also be short-lived. After the November meeting, investors are likely to turn their attention once again to trying to determine where benchmark interest rates will peak and how long they need to stay there before the Fed turns to cutting rates again, Jolly said.

Finally, investors will have to wait until December before they get another update from the Fed’s “point plan,” a collection of top Fed officials’ expectations for the path that interest rates might take.

US stocks fell on Monday, the last trading day of October, with the S&P 500 down 0.6%, the Dow Jones Industrial Average down 0.2% and the Nasdaq Composite down 0.9%. But all three major indexes still continued to post gains for the month, with the Dow on track for its best October ever and its best monthly performance since the 1970s.

-Vivien Lou Chen contributed to this article.

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