Wall Street caught a burst of adrenaline Thursday as the Federal Reserve pumped the brakes on its aggressive rate hiking campaign. Stocks rocketed out of the gates, rallying over 1% after the central bank defied expectations and stood pat on interest rates.
But the euphoria was short-lived. Fed Chair Jerome Powell quickly rained on the parade, firing a warning shot that policymakers are nowhere close to declaring victory against stubbornly high inflation.
When the dust settled, the Dow Jones Industrial Average closed up 180 points or 0.5%. The S&P 500 gained 0.4% while the Nasdaq eked out a 0.6% advance. Hardly the blowout move higher that seemed possible at the open.
The erratic trading captured the fragile state of the market psyche right now. Investors desperately want to hear a dovish pivot from the Fed, clinging to any hints it may soon ease up on its most aggressive rate-hiking cycle since Paul Volcker crushed inflation in the early 1980s.
But Powell wasn’t about to give the green light for markets to declare “mission accomplished.” Not with inflation still running at more than double the Fed’s 2% target.
“Higher for longer is the Fed’s mantra. We are past the ‘higher’ part and into the ‘longer,’ unless something dramatic changes,” said Eric Winograd, AllianceBernstein’s director of developed market economic research.
Those six words – “unless something dramatic changes” – captured the essence of Powell’s presser. For months, the Fed chief has espoused an uncompromising commitment to wrestling inflation back under control, no matter what it takes. That clearly remains the case.
Translation: Don’t expect rate cuts anytime soon, probably not until 2024 at the earliest based on futures pricing. And even that could prove overly optimistic if inflation fails to rapidly moderate in the coming months.
Still, investors desperately want to cling to any silver linings. The fact the Fed refrained from hiking rates for the first time since early 2022 was interpreted by some as a potential pause that refreshes. A respite before the central bank decides if more tightening is truly necessary or not.
“Powell’s emphasis on the next central bank move likely not being a hike should be soothing for financial markets,” said Winograd.
For a few hours at least, that seemed to be the case. Semiconductor titan Qualcomm popped 9% after topping profit forecasts. Tech heavyweights Apple, Amazon, Microsoft and Nvidia all climbed over 1% as the growth trade regained some mojo.
But the optimism wasn’t widespread. Door Dash plunged 13% on a bigger-than-expected quarterly loss as the pandemic delivery darling came back down to earth. Adding to the day’s wild swings, used car retailer Carvana skyrocketed 34% on shockingly strong results.
The starkly divergent reactions underscored how fragile sentiment remains on Wall Street right now. Investors have whipped back-and-forth between stock winners and losers with dizzying speed, struggling to solidify an overarching market narrative.
Will the Fed’s slower rate hike trajectory usher in a long-awaited pause that gives way to rate cuts ahead? Powell certainly didn’t endorse that view, instead repeatedly emphasizing how the central bank remains laser-focused on its inflation fight.
Or will stubbornly hot price pressures ultimately force even more aggressive Fed action in the coming months, dashing hopes for rate cuts and potentially driving the economy into an long-feared recession?
It’s this nagging uncertainty over the Fed’s rate path that keeps breeding violent market gyrations. Thursday’s manic trading session captured that perfectly. One minute investors were bracing for a soft landing assisted by a more pliant Fed. The next they were girding for a hard landing and extended period of economic pain.
This persistent angst virtually guarantees Friday’s April jobs report will be parsed furiously for any clues on the health of the labor market and broader economy. Economists expect a modest slowdown in hiring to 180,000 jobs added last month, down from March’s 236,000 gain.
Any major upside or downside surprise could jolt rate hike expectations and reignite market swings in a heartbeat. Too many new jobs and robust wage growth could be interpreted as a sign the Fed needs to kick its tightening cycle into an even higher gear to cool demand.
Conversely, rapidly deteriorating labor conditions may amplify fears of a sharp economic downturn that inevitably forces Powell’s hand in cutting rates sooner than expected.
Essentially, there is no pleasing markets at this particular juncture. Evidence of an overheated economy will be interpreted negatively. As will signs of excessive cooling and a potential recession.
So while Wall Street rejoiced, at least temporarily, over the Fed’s long-awaited hiking pause, the bout of optimism could prove fleeting. As Powell himself conveyed loud and clear: Policymakers have zero intention of taking their foot off the economic brake until absolutely certain the inflation battle has been won.
