The Dow Jones Industrial Average closed up more than 400 points and gold advanced, as investors cheered what they perceived as Powell’s dismissive view on inflation pressures. The S&P 500 Index closed up 46 points, nearly 1%, and ended the session at 5,224, a historic level. The Nasdaq Composite Index traded up more than 200 points for a gain of 1.25%.
Speaking to reporters after the Fed’s decision on Wednesday, Powell also indicated he intended to slow the pace of the Fed’s balance sheet unwind.
Fed Chair Powell and the Board of Federal Reserve Governors left the benchmark overnight lending rate unchanged at 5.25-5.50%, in line with expectations, in a unanimous decision.
The policy statement, however, signaled more economic strength, noting that job gains have remained strong. This is notably stronger language compared with the January statement, which stated that "job gains have moderated since early last year."
Despite some optimism, there is growing evidence that the Fed may have to turn more hawkish in the coming months. Officials seem to recognize that; in the much anticipated Summary of Economic Projections, the median dot plot again showed three cuts in 2024. However, one Fed official moved the forecast to one dot. This puts the Fed one hawkish revision away from tipping the median to two cuts from three. Estimates for Core PCE (Personal Consumption Expenditure), the Fed’s preferred inflation metric, were raised to 2.6% from 2.4% previously.
Our take: Despite the Fed’s reassurance that inflation is under control, and hopes for three rate cuts this year, there is a growing likelihood the Fed will need to move toward two cuts to keep inflation in check. The balance of risk at the moment suggests Powell is under-reacting in an election year.
