Stock in the US finished mixed on Wednesday, as investors digested the Fed Chair Powell speech after the Federal Reserve kept borrowing costs on hold.
The S&P 500 and Nasdaq pared earlier gains and lost 0.3% each, while the Dow Jones added 85 points.
The central bank acknowledged that inflation is still high and do not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.
On the corporate front, CVS and Starbucks both plummeted, with declines of 16.8% and 15.8%, respectively, following pessimistic results.
The chip sector also underperformed, with Nvidia sliding 3.9%, pressured by AMD's 8.9% decline due to a lacklustre forecast for AI chip sales, and Super Micro Computer's 14.3% drop after Q3 revenue fell short of expectations.
We entered the Fed decision with:
the 2-year yield above 5%,
the S&P 500 having just delivered a down 4.7% month,
GDP in the first quarter having just been revised down dramatically, to under 2%.
These are circumstances that were brought to us by the Fed; by the Fed's historically high level of real interest rates (Fed Funds rate minus the inflation rate), and by the Fed's "sentiment manipulation" ("communications strategy"). On the latter, the numerous public speaking engagements by Fed officials over the past three months successfully moved market expectations from one extreme (expecting as many as seven rate cuts by year-end) to the other extreme.
How extreme had expectations shifted?Â
As of Tuesday’s close, the interest rate market was pricing in less than one full rate cut by year-end. And based on recent comments from a voting Fed member, some in the investment community had even begun to speculate that rate hikes could once again be back in play. Moreover, if we look at the year-end expectations on where the Fed Funds rate will be, it's projecting higher today than it was back in October - at that time, the Fed was projecting an additional rate hike in December, and still engaged in the tightening cycle.
Now, not only does this dramatic swing in market interest rates and expectations tighten financial conditions (adding to an already historically tight real interest rate, set by the Fed), but it increases the risk of a liquidity shock.
With that, continuing on from my Tuesday note, it was crucial for the Fed decision/press conference that they move the rate expectations pendulum back toward the middle. So, what did the Fed Chair, Jerome Powell, have to say?
He shot down the notion that Tuesday's hotter wage report was an inflation concern.
He shot down the notion that the economy is settling into a stagflation stage (i.e. slow growth, high inflation). He said growth is neither slow, nor is inflation high (relative to historic stagflation periods).
He shot down the notion that the policy path could include a rate hike as the next move. He said the discussion at the Fed is not about direction, but "how long to hold rates in restrictive territory."
This was clearly a dovish message from the Fed and it countered a market that was positioned for something ranging from hawkish to very hawkish. That should take pressure off of the interest rate market, and should provide support for stocks, coming out of an April retracement.
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