Today's Fed meeting statement reiterated policymakers' plan for "ongoing increases" in the U.S. central bank's key interest rate. Coming as the Federal Reserve's rate-setting committee announced a quarter-point move, the wording implies two additional hikes are likely. The S&P 500 held its ground, then turned higher as Fed Chair Jerome Powell spoke and kept gaining steam.
At his 2:30 p.m. news conference. Powell sounded only slightly less hawkish than he has previously, but he sounded more upbeat about the chances of a soft landing for the U.S. economy.
"The disinflationary process has started," he said, but inflation "remains too high."
"We will stay the course until the job is done."
"The labor market continues to be out of balance," Powell said. He noted that wage growth is "abating a little bit" but remains "at levels that are fairly elevated."
However, he called it "gratifying" that disinflation is occurring without a major weakening of the labor market. "I still think there's a path" to getting inflation down without a major economic downturn.
Powell Talks Risk-Management
Powell didn't rule out the possibility that incoming inflation and wage data, if they're benign, could lead the Fed to hike less. However, he explained that the Fed has to think about managing risk.
"It's very difficult to manage the risk of doing too little," which could lead to inflation becoming entrenched, he said.
"We have no desire and no incentive to overtighten." But he added that the Fed has tools that can support growth, if needed.
March Fed Meeting Expectations
After the Fed meeting, markets were still betting that the Fed will pause rate hikes after next month, with the key overnight lending rate at a range of 4.75% to 5%. That's below the 5%-5.25% range Fed policymakers projected in December.
Investors' conviction about a quicker end to rate hikes grew after relatively tame wage-growth data released on Tuesday. As of Wednesday afternoon, markets are pricing in 13% odds that today's rate hike would be the last, according to CME Group's FedWatch page.
Odds of additional hikes in both March and May stand at 39%.
Jobs, Wage Data Are Key
On Tuesday morning, the Labor Department's Employment Cost Index showed compensation costs rose 1% in Q4 vs. the 1.1% expected. However, compensation rose 5.1% from a year ago, a slight uptick from the 5% growth in Q3.
Economists pay close attention to wage growth for private-sector workers, excluding those in incentive-paid occupations, as a good indicator of underlying wage growth. In Q4, pay in this category rose 0.9%, or a 3.6% annualized pace. That measure excludes occupations in which pay is driven by commissions, which may be more influenced by cyclical highs and lows. The ECI report has elevated importance with the Fed emphasizing the need for lower wage growth to return inflation to the 2% target. Powell has said that wage growth easing to 3.5% would be sufficient.
Yet after the great news on wage growth, today's Labor Department report showed job openings unexpectedly jumped by 572,000 jump to just over 11 million in December.
Powell has repeatedly highlighted the surplus of job openings relative to unemployed workers as a key reason for unusually strong wage growth. In December, the ratio of job openings to unemployed workers rose to 1.9 from 1.7, far above the pre-Covid peak.
With consumer spending and manufacturing both showing signs of weakness, Friday's January jobs report will provide more evidence as to whether the economy's last major source of strength is giving way. Analysts expect a solid gain of 185,000 jobs, but average hourly wage growth is seen easing to 4.4% from 4.6% in December.
S&P 500 Set-Up
In Wednesday afternoon stock market action, the S&P 500 rose 1.1%, having traded lower before the Fed meeting ended. That follows Tuesday's 1.5% gain for the S&P 500 after tamer ECI data. Through Tuesday's close, the S&P 500 had rallied 14% off its Oct. 12 bear-market closing low, but was still 15% below its all time high.
On Friday's the S&P 500 crested around 4094, making a third run at clearing 4100 since the start of December. That's the key level to watch for now. On Tuesday, the S&P 500 closed at 4076.60, right near its high for the day. With Wednesday's rally, the S&P 500 climbed past 4120, breaking out of its trading range.
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As stocks rallied, so did U.S. government bonds. The 10-year Treasury yield slid 13 basis points to 3.4%, near a four-month low.
