Federal Reserve chair Jerome Powell said in a Friday speech that it's too soon to declare an end to rate hikes, much less to speculate on when Fed rate cuts will happen. But markets largely disregarded his comments, with Treasury yields tumbling and the S&P 500 rising modestly.
"It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance (of monetary policy), or to speculate on when policy might ease," Powell said in remarks that hit the wires at 11 a.m. ET. "We are prepared to tighten policy further if it becomes appropriate to do so."
ISM Data Outweighs Fed Chair Powell
Yet investors seem confident that rate hikes are done. Reading between the lines, Powell's remarks don't rule out a change in the Fed's next policy statement on Dec. 13. The Fed could end its tightening bias and say that economic risks are balanced, meaning rate cuts are as likely as rate hikes.
A soft reading for the Institute for Supply Management's manufacturing survey index for November, released an hour before Powell's talk, probably diluted any market impact of his modestly hawkish words.
The ISM manufacturing index held at 46.7, remaining in contractionary territory below 50. The employment subindex fell to 45.8, which may point to a decline in manufacturing jobs in next Friday's November employment report.
With key employment data on the way before the Fed's meeting, Fed chief Powell had reason to avoid any shift in tone, sticking to his oft-repeated statement that policy decisions will be data-dependent.
Federal Reserve Rate Cuts Coming
Still, everything seems to be pointing to rate cuts starting this spring. On Thursday, the Fed's primary inflation gauge, the PCE price index, showed both overall and core inflation easing to a 2.5% annual rate over the six-month period through October, not far above the 2% target.
In a Thursday morning speech, New York Fed President John Williams said monetary policy is the most restrictive it has been over the past 25 years. By that he means that the Fed's key rate is at its highest point relative to a neutral policy rate that neither supports nor detracts from growth.
Treasury yields have tumbled this week since Fed Gov. Christopher Waller, a fixture of the higher-for-longer rate consensus, on Tuesday signaled that policymakers are ready for a quick pivot to rate cuts as growth slows and inflation continues to recede.
Despite Powell's remarks, markets are pricing in 64% odds of a rate cut at the Fed's March 20 meeting, according to CME Group's FedWatch tool. Markets expect at least two quarter-point cuts by the June meeting.
S&P 500, 10-Year Treasury Yield Reaction
The S&P 500 rose 0.4% in Friday afternoon stock market action. After surging close to 11% over the past four weeks, the S&P 500 has clawed out a slim 0.3% gain this week.
The 10-year Treasury yield tumbled 9 basis points to 4.26%. The 10-year Treasury yield, after slumping on the ISM data, bounced only briefly upon release of Powell's remarks, then undercut its lows of the session, falling to a 10-week low.
The two-year Treasury yield skidded 11 basis points to 4.6%, continuing to outpace the 10-year yield's decline as the yield curve becomes significantly less inverted.
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