Inflation Slows and the Market Pops

Yesterday, Federal Reserve Chairman Jerome Powell said inflation pressures are starting to ease. He surprised investors by stating the central bank will likely slow the pace of rate hikes in December. This news sent the stock market screaming higher.

5-Day Performance for Stocks

The Dow Jones Industrial Average closed up 737.24 points, or 2.18%, to 34,589.77. Meanwhile, the Nasdaq Composite jumped 4.41% to 11,468.00. The S&P 500 added 3.09% to 4,080.11.

Additionally, the central bank chief spoke about the overall economic outlook and inflation. The discussion focused on how the central bank is using monetary policy to subdue inflation growth and restore price stability.

The most notable part of the discussion was his recognition of inflation pressures beginning to ease. He pointed to data showing how the Fed is succeeding in its fight to bring down house prices and boost the labor supply.

Powell stated economic output has slowed due to the central bank’s rate hikes. He said gross-domestic-product growth is on track to be nearly flat this year compared with the 5.7% expansion last year and the 2.3% average in the 10 years prior to the pandemic.

As a result, members of the rate-setting Federal Open Market Committee (“FOMC”) feel it will soon be appropriate to slow the pace of interest-rate hikes. Powell said it could happen as soon as December. The implication is an increase of 0.5% versus the 0.75% jumps we’ve experienced over the previous four monetary policy meetings.

The change would signal the rate-hike cycle is closer to ending. That would act as a long-term tailwind for the stock market.

S&P 500 Historical Returns After Previous Rate-Hike Cycles

We’re definitely not out of the woods yet, and there will certainly be much more volatility to come in the short-term, but overall this is positive news. The removal of uncertainty should boost the outlook for the economy and risk assets like stocks.

Source: Stansberry Research