Federal Reserve Delivers Huge Rate Hike, ‘Might’ Do Another; Dow Jones Rallies

The Federal Reserve delivered a 75-basis-point rate hike for the second straight meeting, putting its mandate to bring down inflation ahead of concerns about softening economic growth. With the super-size rate hike expected, the Dow Jones Industrial Average stayed positive, then turned higher as chair Jerome Powell spoke, offering a hint of dovishness. Nasdaq gains were even more robust.


The Fed has now hiked its key overnight lending rate to a target range of 2.25%-2.5%, up from 0-0.25%, since mid-March.

Opinion on Wall Street has been divided over whether the Fed’s next meeting, Sept. 20-21, will bring a half-point hike or a third straight 75-basis-point rate increase.

Powell didn’t settle the debate. He said that another 75-basis-point hike “could be appropriate,” but that will depend on the intervening data. He made clear that decisions will be made on a “meeting-by-meeting basis,” given the uncertain outlook.

But Powell did provide guidance that the Fed policy rate would move to a “moderately restrictive level,” somewhere between 3% and 3.5% by year end, basically what the market expects.

After the Fed meeting, market pricing reflected somewhat lower odds — about 43% — for a third-straight hike of 75 basis points on Sept. 21, according to CME Group’s FedWatch page.

Powell: Soft Landing Still Possible

“There’s a feeling that the labor market may be moving back into balance,” Powell said. He cited weaker data in the Labor Department’s household survey and anecdotal evidence from businesses.

He said the Fed still sees a path, though narrow, to a soft landing for the economy, skirting recession.

Here’s the takeaway for stock market investors, given the recent rally in the Dow and other indexes: Although Fed policy works by tightening financial conditions, which are reflected in stock prices, policymakers aren’t worried at the moment that rising stock prices will counteract policy tightening.

That may partly be because, as Powell said, there is a lag before Fed policy tightening is felt. Part of that may be the ongoing balance-sheet tightening, which began in June. By September, the Fed balance sheet will contract by up to $95 billion per month.

However, Powell said the Fed will keep an eye on asset prices. If financial conditions loosen to an extent that they’re boosting demand, contrary to Fed intentions, policy can adjust.

Federal Reserve Policy Statement

Inflation finally appears to be past the peak, with the price of gas and other commodities sliding. Meanwhile, a raft of unexpectedly weak economic data has begun piling up.

Still, the Fed statement didn’t suggest any significant shift in the inflationary backdrop. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

The statement also offered a mixed picture of the economy, even as recession red flags are accumulating. “Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. “

The 9.1% inflation reading in June’s consumer price index update and the reported 372,000 job gain last month is too fresh for a Fed pivot. But the real test will come when it becomes clear that the job market is tanking. A slowdown in federal taxes withheld from worker paychecks suggests that may happen as soon as next Friday’s July jobs report.

Dow Jones And Treasury Yield Reaction

Shortly after release of the Federal Reserve policy statement, the Dow Jones was up 0.4%. But as Powell spoke, the Dow’s gain picked up to 1.5%. The S&P 500 rose 2.6% and the Nasdaq composite 3.9%.

The Dow and other major indexes hit bottom in mid-June, just after the Fed’s first 75-basis-point hike. The Fed had accelerated its tightening plans after May’s consumer price index showed the inflation rate surging to a 40-year-high 8.6%. June’s still-higher inflation data kept Fed policymakers on high alert.

But many Wall Street strategists now think that softening economic data, easing inflation and a stronger dollar mean the Fed won’t hike as much as feared. As slow growth turns to a brush with recession, the Fed is seen pausing rate hikes. By the spring of 2023, many think a rate cut may be up for consideration.

That’s why the trend since mid-June has been lower Treasury yields and higher stock prices.

The Dow has still climbed 6.3% from its June 17 closing low. That cut its loss to just 13.7% from its Jan. 4 all-time closing high. The S&P has retraced 6.9% of its losses and now stands 18.25% off its peak close. The Nasdaq has enjoyed an 8.6% bounce, but remains 28% below its peak.

The rally has come as the 10-year Treasury yield, after spiking close to 3.5%, has fallen back. On Wednesday, the 10-year yield eased 3 basis points to 2.76%.

The Dow Jones and other major indexes have broken above their 50-day lines for the first time since April. That reflects optimism about a Fed pivot, but the uptrends are currently under pressure. Be sure to read IBD’s daily The Big Picture column after every trading day to stay on top of the market trend and what it means for your trading decisions.

Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.


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