Powell Keeps Hawks At Bay, Says Interest Rate Hike 'Unlikely': Stocks, Gold Rally, While Treasury Yields, Dollar Tumble

BY Benzinga | ECONOMIC | 05/01/24 03:51 PM EDT

Federal Reserve Chair Jerome Powell emphasized the need to allow more time for restrictive monetary policies to bring inflation toward the Fed’s 2% goal Wednesday while reassuring markets the Fed’s policy stance remains appropriate, pushing back fears of rate hikes.

“The inflation data received so far this year have been higher than expected,” Powell said adding that it is likely that gaining greater confidence in disinflation will take longer than previously thought.

Addressing concerns about potential rate hikes due to recent inflationary pressures, Powell said: “I think it’s unlikely that the next policy rate move will be a hike. We’d need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation sustainably down to 2% overtime. That’s not what we think we’re seeing.”

Powell Expects Lower Inflation Over The Year, But Says Rate Cuts Can Wait

Powell said he believes that inflation will move back down over the year and that it will be lower than the latest readings.

“We’ve got work left to do, but we’re not looking at the very high inflation rates that we were seeing two years ago,” the Fed chair said.

Regarding rate cuts, Powell reiterated his previous comments.

“It wouldn’t be appropriate to dial back our restrictive policy stance until we’ve gained greater confidence that inflation is moving down sustainably toward 2%,” he said.

“I don’t know how long it’ll take. I can just say that when we get that confidence then rate cuts will be in scope,” he added.

If that inflation is moving sustainably down to 2% and there is an unexpected weakening in the labor market, for example, that would be a path for the Fed to cut interest rates, Powell said.

The labor market remains relatively tight, but demand and supply have moved into better balance, he said.

“Policy is well positioned to address different paths that the economy might take,” Powell said, indicating a preference for keeping rates steady for longer.

Turning to the specifics of the Federal Reserve’s balance sheet, the Federal Open Market Committee has decided to slow its balance sheet runoff, reducing the reduction of securities holdings from $60 billion per month to $25 billion starting June 1.

“The decision to slow the pace of runoff does not mean that our balance sheet will ultimately shrink by less than it would otherwise,” Powell said, adding the Fed is aiming for a smoother transition and to mitigate potential stresses in money markets.

Addressing speculation around stagflation, Powell expressed confusion, contrasting current economic indicators with those from the 1970s, a period known for stagflation.

“I don’t really understand where that’s coming from,” he said, highlighting significant differences with today’s economic scenario, which includes a 3% growth rate and inflation below 3%.

Market Reactions: Stocks, Gold Soar, While Dollar Takes A Blow

Market participants interpreted Powell’s remarks as less hawkish than feared, which sparked a relief rally in stocks and gold.

Traders raised their bets Wednesday on a Federal Reserve rate cut by September, indicating expectations that a cut is more likely than not, according to the CME Group’s FedWatch tool.

Treasury yields fell sharply across the board, with the policy-sensitive two-year yield falling from over 5.03% to 4.95%. Yields on the 10-year benchmark slowed by 6 basis points to 4.64%.

The S&P 500, as tracked by the SPDR S&P 500 ETF Trust (SPY) , rallied over 1% after the Fed statement and Powell’s press conference.

The tech-heavy Nasdaq 100, as monitored through the Invesco QQQ Trust , outperformed, rallying 1.6%.

Gold also increased by about 1%, as the U.S dollar index (DXY), tracked by the Invesco DB USD Index Bullish Fund ETF , fell 0.3%.

Chart: Markets React To May FOMC Meeting

<figure class="wp-block-image size-large"></figure>

Federal Reserve Chair Jerome Powell speaks at a press conference Wednesday, May 1, 2024. Photo courtesy of the Federal Reserve.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.