Stocks rallied and Treasury yields fell Wednesday after the head of the Federal Reserve said that the central bank could soon begin easing up on its aggressive interest rate increases aimed at taming inflation.
Fed Chair Jerome Powell, speaking at the Brookings Institution, reaffirmed that the central bank could begin moderating its pace of rate hikes as soon as December, when the policymaking committee is due to hold its next meeting.
“We have a risk management balance to strike,” Powell said. “And we think that slowing down (on rate hikes) at this point is a good way to balance the risks.”
While citing some recent signs that inflation is cooling, Powell stressed that the Fed will push rates higher than previously expected and keep them there for an extended period to ensure inflation comes down sufficiently.
“History cautions strongly against prematurely loosening policy,” Powell said. “We will stay the course until the job is done.”
Stock indexes, which had been wavering ahead of Powell’s remarks at 1:30 p.m. Eastern, rose broadly in afternoon trading. The S&P 500 rose 2% as of 3:01 p.m. Eastern, on pace to snap a three-day losing streak. The Dow Jones Industrial Average gained 420 points, or 1.3%, to 34,277, and the Nasdaq climbed 3.1%.
Treasury yields fell. The yield on the 10-year Treasury dropped to 3.70% from 3.75% late Tuesday. The yield on the two-year note, which tends to track market expectations of future Fed action, fell to 4.38%. It was trading at 4.48% late Tuesday and had been as high as 4.53% shortly before Powell’s speech.
Major indexes have been unsteady as the economy and financial markets deal with stubbornly hot inflation and the Fed’s attempt to cool high prices with aggressive interest rate increases. Still, the benchmark S&P 500 and the Dow are solidly on track to close out November in the green, which would mark their second straight monthly gain.
U.S. crude oil prices climbed 3%.
All of the company sectors in the benchmark S&P 500 rose, with technology and communication stocks powering much of the rally. Apple rose 3.5% and Netflix jumped 8.6%.
Markets in Asia and Europe closed mostly higher.
Wall Street has been hoping that the Fed will slow the scale and pace of its interest rate hikes. The central bank has been very clear about its intent to raise interest rates until it is sure inflation is cooling.
The Fed has raised its benchmark interest rate six times since March, driving it to a range of 3.75% to 4%, the highest in 15 years. The goal is to make borrowing more difficult and generally slow the economy in order to tame inflation.
Those increases have helped send mortgage rates sharply higher, causing home sales to plunge, and it has raised costs for most other consumer and business loans. Many economists expect the U.S. will slip into a recession next year as higher borrowing costs slow economic activity.
In his remarks Wednesday, Powell said the Fed may increase its key interest rate by a smaller increment at its December meeting, only a half-point, after four straight three-quarter point hikes.
“Cutting rates is not something we want to do soon,” Powell said. “That’s why we’re slowing down.”
The economy has been slowing, but contains strong pockets that have given markets hope that a recession could be avoided. The government on Wednesday said the economy grew at a 2.9% annual rate from July through September, an upgrade from its initial estimate.
Consumers have continued spending, despite of inflation squeezing wallets, and the overall employment market remains strong.
The employment market remains a big focus for the Fed and investors. It’s strength has helped the broader economy, but makes it more difficult to cool inflation.
“If we can get a weaker labor market, we’ll probably get weaker wage pressure,” said Scott Ladner, chief investment officer at Horizon Investments. “That’s sort of the last shoe to drop with inflation.”
Economic data on Wednesday showed signs of a softening labor market, though it remains relatively strong historically. The U.S. government reported that job openings dropped in October more than economists had anticipated. Human resources company ADP reported an easing in private sector employment growth in November.
Investors will get more data Thursday on the employment sector with a report on weekly unemployment claims. The closely watched monthly report on the job market will be released on Friday.