Powell Testifies Before Homes Run Market Higher

Federal Reserve Chairman Jerome Powell delivered his semiannual monetary policy report to the House Financial Services Committee as he testified before Congress on Wednesday. We’re now about two weeks away from the next meeting of the Federal Open Market Committee (FOMC), and investors are probably hoping to get a glimpse of what the Fed will do on interest rates.

In today’s testimony, Powell provided insight into where the central bank stands ahead of the March FOMC meeting, and markets responded favorably. In midday trading Wednesday, all major indices were up, with the S&P 500 up about 44 points (0.9%), the Dow Jones Industrial Average up 217 points (0.6%), and the Nasdaq Composite Index up 166 points (1%).

The Fed is on track to lower interest rates.

Chairman Powell has made quite a few comments that could be interpreted by investors as repeated emphasis that the Federal Reserve will continue to cut interest rates this year. The big question is when.

“Our policy rates are likely to peak during this tightening cycle,” Powell said in prepared remarks to the committee, with inflation moving closer to its 2% target without a significant impact on unemployment or economic growth. “If the economy develops broadly as expected, it may be appropriate to begin easing policy curbs at some point this year.”

But he added that lowering interest rates too early or too much could reverse inflation progress and ultimately require tighter policies to return inflation to 2%. At the same time, reducing policy curbs too late or too little could unduly weaken economic activity and employment.”

That doesn’t necessarily mean interest rates will start easing in March. As Chairman Powell said, the committee “does not expect that it would be appropriate to reduce the target range until we have greater confidence that inflation will continue to move toward 2%.”

Personal consumption expenditures (PCE), a key indicator of inflation that the Fed relies on, fell from 2.6% in December to 2.4% in January. It may take another month or two for the PCE to fall before interest rate cuts can kick in.

The February PCE report is scheduled to be released on March 29, so no action is expected until the April 30-May 1 meeting at the earliest. However, if current trends continue, it is more likely that some action will be taken at the June 11-12 meeting.

Later, during a question-and-answer session with members of the House Financial Services Committee, Prime Minister Powell expressed growing confidence that the economy was on track.

“I think the strength of the economy, the strength of the labor market and the progress we’ve made allows us to approach that step with caution, caution and greater confidence,” Powell said. “Once we reach that confidence, hopefully we will do so sometime this year. “Then we can start putting restrictions on our policies again.”

No signs of recession

Another positive thing the collective market took away from Powell’s comments was his outlook for the economy. For months, investors have been hearing talk about a 2024 recession, a stock market downturn, and even a recession.

However, the stock market rose about 7%, and the economy grew faster than expected, with gross domestic product (GDP) increasing 3.3% in the fourth quarter and 3.1% for 2023 as a whole. Asked about the economy, Powell said he expects it to continue expanding at a robust pace in 2024.

“I will tell you that there is no evidence or reason to believe that the U.S. economy is at risk of falling into a recession in the near term or that it is,” Powell said during a Q&A session. “Still, there is always the possibility that the economy will fall into recession. “I don’t think that’s very likely at this point,” he said.

Technology stocks, which are typically most resistant to higher interest rates, rose the most Wednesday, with the Nasdaq surging more than 1%.

Chairman Powell is scheduled to address the committee again on Thursday, followed by the FOMC meeting on March 19th and 20th. Investors will no doubt be able to get more clues.