The S&P fells, Nasdaq declines and the Dow is down after Jerome Powell remarks on the Federal Reserve’s next steps
As expected, the Federal Reserve will remain committed to its mission, which is bringing down the all-time inflation rate. Today, Jerome Powell, in his annual speck at Jackson Hall, remarked that there will be more hawkish rates and the hikes won’t stop until they are sure that inflation is done. Powell’s speech was brief and short compared to the previous speeches in the hall; it lasted for only 8 minutes at most. Living investors are a bit unaware of how much the central banks will increase their interest rates and till when it lasts, plus additional information.
After 4 consecutive rates in March, April, June, and July, investors believe that the Federal Reserve will start easing its monetary policy. Till now, policymakers had increased the banks’ interest rates by 225bp, the highest increase in interest rates in the past decades.
The July CPI reports show a positive decline in consumer product prices, including gas, groceries, and utilities. Along with a strong job growth report, experts say that it’s time to increase interest rates at a slower pace and a less aggressive rate.
Wall Street declined today at the opening of trading hours and kept going down after the FED chairman’s remark.
Stocks stumbled minutes after Powell’s public speech. The S&P 500 is now down by 1.47%, erasing most of this week’s gains. The heavy tech Nasdaq index declined by 1.78%, putting extra pressure on tech stocks and causing a massive sell-off among investors. The Dow Jones industrials stumbled by 1.12%. On the other hand, bond yields jumped.
While it was clear that the Federal Reserve would tighten its monetary policy, investors were hoping for less aggressive hikes. All monetary decisions are made based on economic data, which is now unfortunately low. Energy, groceries, and food prices remained high despite the minor decline in July, and the slow labor market growth is considered an important data point.
The Bureau of Economic Analysis showed on Friday that both, consumer prices (CPE), plus energy prices fell last month. The market analysis forecasts that the PCE will increase by 4.7% in the same month as last year, supporting the Federal Reserve’s commitment to taming inflation. The final goal is to tame the inflation rate from 8.6% to 2% by aggressively increasing interest rates by a rate of 50-75bp in the next meetings.
Bond yields increased today as other sectors are showing signs of bankruptcy and a sharp activity decline. As for the traders’ part, most traders are expecting interest rates to be between 50 bps and 75 bps, but it is more likely to see a three-quarter point interest hike in September.
Today’s remarks have erased most of this week’s gains. The stocks are already considered high-risk assets. Investors started selling their stocks over the past three weeks. As for the S&P, the data shows that several sectors underperformed today, including communication, real estate, and energy.
It is uncertain how badly these sectors will perform in the next few weeks, but other sectors perform very well, including financial services and utilities.