Federal Reserve Chairman Jerome Powell presented a somewhat more upbeat view of the economic outlook on Monday, following last week's revisions to income data that showed the consumer in better shape. After his afternoon comments, odds of another big Fed rate hike slipped. The S&P 500 fell modestly for a while, but recovered for modest gains.
Speaking at the National Association for Business Economics, Powell characterized the economy as being in "solid shape." However, any shift in Powell's view since the Fed's half-point rate cut on Sept. 18 didn't become clear until the Q&A session.
Fed Chair Powell's Comments
Powell highlighted upward revisions to income data unveiled last Thursday by the Bureau of Economic Analysis. Previously it looked like households were relying on borrowing to keep consumption afloat. July data showed the households were saving just 2.9% of disposable income, a historically very low level. But the revisions showed savings at 4.9% of disposable income.
"That suggests spending can continue at a healthy level," Powell said.
Along the same lines, Powell also referenced upward revisions to the broadest category of income known as gross domestic income, or GDI, which provides alternative way from gross domestic product of sizing the economy. GDI adds up income earned and the costs of production.
Powell called the upward revision to GDI "quite interesting" and said it "removes a downside risk to the economy."
Fed Rate-Cut Outlook
The Fed's basic approach hasn't changed. Powell has said he doesn't want to see the labor market soften up any further. If it does, the Fed will be prepared to cut its key rate by more than the quarter-point that policymakers signaled in new projections released on Sept. 18.
After Powell's Monday remarks, markets were pricing in 35% odds of a half-point rate cut on Nov. 7, the Fed's next meeting. That's down from about 40% Monday morning and off from 53.3% as of Friday.
However, markets are still tilting toward 75 basis point in rate cuts of the final two Fed meetings of the year. Odds stand at 64%, down from 79% on Friday.
There are two more monthly jobs reports before Nov. 7. The September jobs report on Friday is expected to show 132,500 net new jobs, including 125,000 in the private sector, and a steady 4.2% unemployment rate.
If job growth slows to around 100,000 a month, another half-point rate cut may be in the cards, while job gains of around 150,000 will sink chances of a half-point cut.
Powell's words on Monday don't change the story, but do suggest the Fed is now a bit less worried that hiring will continue to fade.
S&P 500 Finishes With A Modest Gain
The S&P 500 fell modestly following Powell's remarks, but recovered to finish up 0.4%, right, at session highs.
That's a record close, just below Thursday's intraday all-time peak.
A stronger consumer and firmer economic expansion can't be considered bad news for S&P 500 companies. The real risk to stocks comes from a recession. Still, investors would prefer to see a perfect scenario of aggressive Fed easing amid solid consumption. That may be too much to hope for.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
