Both the S&P 500 and Nasdaq Composite spiked sharply higher following Federal Reserve Chairman Jerome Powell’s speech. Powell took on a surprisingly dovish tone and noted that the Fed could possibly slow down the pace of its rate hikes.
Interest rates have been raised this year to combat consistently high inflation rates. However, the October consumer price index ( ) figure, which measures inflation, came in at 7.7% year-over-year (YOY), below the estimate of 7.9%. That’s a sign that the rising rates have done their job to combat inflation. The Fed ultimately has a goal of 2% YOY inflation.
The Fed will hold its next Federal Open Market Committee (FOMC) meeting on Dec. 13-14. Investors are now expecting a 50 basis points (bps) raise instead of 75 bps, with Powell hinting that: “The time for moderating the pace of rate increases may come as soon as the December meeting.” Many other Fed officials have voiced their approval for a 50 bps hike.
During the last meeting in November, the Fed raised rates by 75 bps to between 3.75% and 4.00%. That was the fourth consecutive hike of 75 bps.
However, investors shouldn’t expect a Fed pivot anytime soon, with Powell noting that: “Despite some promising developments, we have a long way to go in restoring price stability.”
With that in mind, let’s take a look at the seven key takeaways from Powell’s speech.
7 Key Takeaways From Powell’s Speech Today
- Powell believes that the labor market has shown “tentative signs of rebalancing.”
- He attributes the lower level of Americans seeking work to workers retiring early due to the onset of the Covid-19 pandemic. Other possible factors include coronavirus deaths and reduced levels of legal immigration.
- However, the Fed’s policies may have had the effect of slowing inflation and wage growth by reducing employment demand.
- “For the near term, a moderation of labor demand growth will be required to restore balance to the labor market,” said Powell.
- U.S. unemployment tallied in at 3.7% during October. At an earlier event, Powell noted that unemployment rates between 4% and 5% would still signal a healthy labor market.
- Furthermore, Powell added that rates would likely be raised to above the 4.5% to 4.75% projection given during September.
- The CME FedWatch Tool currently shows that futures traders are pricing in a 75% chance for a 50 bps hike and a 25% chance for a 75 bps hike next month.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.