Inflation is slowing, but is the Federal Open Market Committee (FOMC) willing to loosen America’s monetary policy in 2023? That was the trillion-dollar question as the FOMC convened its February meeting and Federal Reserve Chairman Jerome Powell provided clues on how the central bank’s future policy decisions.
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It’s a momentous event, as this marks the Federal Reserve’s first interest rate policy decision of the year. As you may recall, the central bank raised the federal funds rate, which affects many other interest rates in the U.S., by 75 basis points (bps) or 0.75% four consecutive times in 2022. This occurred in response to elevated inflation, in which the Consumer Price Index (CPI) reached a 40-year peak of 9.1% in June.
The CPI has cooled off quite a bit since then, coming down to 6.5% in December. Also that month, the Federal Reserve stopped its series of 75-basis-point rate hikes and instead enacted a 0.5% federal funds rate raise.
It’s also worth noting that the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) index, declined to 5% in December after peaking at around 7% in June. With that in mind, many people fully expected the Federal Reserve to enact a February interest rate hike of only 0.25%. They also anticipated that Powell might take a more accommodative tone in his comments during this FOMC meeting. So, were they right in their prediction of a more dovish-leaning Fed?
Market Focuses on Key Phrases, Stocks Rocket Higher
As it turns out, the market got what it wanted and expected: an interest rate rise of 25 instead of 50 basis points. With that, the Federal Reserve’s target range for the federal funds rate is currently 4.5% to 4.75%; this is the highest target range since 2007. Furthermore, while the FOMC acknowledged that inflation “has eased somewhat,” the committee continues to see a need for “ongoing increases in the target range.” Therefore, don’t expect this to be the final interest rate hike of 2023.
The real suspense came when Powell made his post-meeting speech and addressed questions from the press. The Fed chairman served up some tough, hawkish talk with utterances like, “It would be very premature to declare victory, or to think that we’ve really got this” (referring to inflation); “inflation is still running very hot”; and the “job is not fully done.”
None of that was hawkish enough to stop bullish investors from buying up stocks, however. They chose to focus on Powell’s more optimistic-sounding phrases: “We can now say I think for the first time that the disinflationary process has started. We can see that, and we see it really in goods prices so far;” it’s “certainly possible” that the Federal Reserve will keep its benchmark interest rate below 5%, and the Fed can get inflation back down to its 2% target “without a really significant downturn, or a really significant increase in unemployment.”
Consequently, stock traders held up hope that a soft landing may still be possible. By 3:00 p.m. Eastern time, the S&P 500 (SPX) was up nearly 1%, and the Dow Jones Industrial Average (DJIA) was slightly green after having spent most of the day in the red. Meanwhile, the Nasdaq 100 (NDX), which is typically more sensitive to interest-rate policy changes, rallied 1.8% (though it was also boosted by soaring Advanced Micro Devices (NASDAQ: AMD) stock).
The main takeaway here is that the market will sometimes cherry-pick the phrases and statements it wants to hear. Today, Powell’s post-meeting talk wasn’t entirely accommodative, but it did provide a hint of hope to weary stock investors – and that, evidently, was enough to get traders in a buying mood.
