Federal Reserve Chair Jerome Powell on Tuesday didn't adopt a more hawkish tone in the wake of a surprisingly strong January jobs report. The S&P 500 rose solidly after Powell's talk, after some volatile swings higher and lower.
Wall Street was on alert for more hawkish commentary after Friday's jobs report showed a net gain of 517,000 jobs as the unemployment rate fell to a 53-year-low 3.4%.
On Monday, Atlanta Fed President Raphael Bostic said the persistent strength of the labor market may compel policymakers to hike further than anticipated.
Powell didn't go quite that far, but noted that if economic data continues to come in stronger than expected, "it may well be the case that we have to do more."
"January's jobs data didn't really change Chair Powell's message," wrote Comerica Bank chief economist Bill Adams. The jobs data, he added, likely overstated the strength of the labor market, citing a jump in January layoff announcements.
Powell indicated that "financial conditions have tightened significantly" in response to the latest jobs report. The takeaway is that he's more or less comfortable with current market pricing.
The Fed chair did note that the war in Ukraine and China's economic rebound both present some risk of higher-than-expected inflation.
Fed Rate Hike Odds
Markets are now pricing in 100% odds that the Fed will hike a quarter-point on March 22 and 76% odds that the Fed will hike another quarter-point on May 3. That would bring the federal funds rate to a 5%-5.25% range, which December Fed projections indicated would be the likely peak of the cycle.
Wall Street sees about 40% odds that the Fed will have to make one additional rate hike, up from 3.6% just a week ago.
However, markets still see a two-thirds chance that the Fed will cut its key rate to 4.75%-5% by year's end.
Powell's remarks on Tuesday didn't significantly challenge that outlook. The S&P 500 had surged as Powell spoke last Wednesday, highlighting that "the disinflationary process has begun."
Powell said on Tuesday that the disinflationary process will take time, noting that it has yet to bring down inflation for core services, excluding housing.
On a positive note, Powell said that a renewed increase in immigration after a sharp slowdown earlier in the pandemic seems to be alleviating the labor shortage.
S&P 500 Reacts To Powell
After Powell spoke, the S&P 500 rose 1.3%, near session highs after some big swings in the afternoon. The Dow Jones Industrial Average gained 0.8%, while the Nasdaq composite jumped 1.9%.
After pulling back on Friday and Monday, following the jobs report shock, the S&P 500 found its footing on Tuesday. The blue-chip index is holding above the key 4100 level that it had struggled to get past before surging as Powell spoke on Wednesday.
Be sure to read IBD's The Big Picture every day to stay in sync with the market direction and what it means for your trading decisions.
The 10-year Treasury yield initially slipped but later rose 4 basis points to 3.67%.
