Fed feeds Wall Street’s soft landing hopes, though recession fears still loom
TORONTO (Feb 2) A more dovish-than-expected message from Federal Reserve Chairman Jerome Powell stands to further boost hopes of slowing rate hikes and a so-called economic soft landing that have fueled a powerful rebound in U.S. stocks.NEW YOR
For weeks, hopes that easing inflation and cooling growth will allow the Fed to pull back from its hawkish monetary policy outlook have boosted stocks and other risk assets after a brutal 2022.
Many on Wall Street remain convinced that a widely expected recession is likely to roil markets once again sometime this year. Bullish investors, however, took heart at Powell’s comments at the end of Wednesday’s monetary policy meeting, when he acknowledged progress in the fight against inflation and appeared reluctant to push back against the rally in stocks and bonds.
“At this point, the market has welcomed the fact that a couple of more increases at 25 basis points basically means just marginal adjustments,” said Alessio de Longis, senior portfolio manager at Invesco Investment Solutions. “The light at the end of this monetary cycle is coming.”
De Longis is betting on more gains in many of the asset classes that have thrived in recent weeks, including shares, emerging markets and higher-yielding debt.
The S&P 500 rose more than 1% on Wednesday, and is now up more than 7% for the year. Yields on the benchmark U.S. 10-year Treasury, which move inversely to prices, fell after the meeting and have declined by more than 40 basis points in 2023.
To be sure, Powell gave little indication that the Fed was close to veering from its rate hike trajectory after it announced a widely expected 25 basis point rate increase. He said “a couple more” rate increases likely lay in store.
Still, Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, said the market was cheered by the lack of “hawkish pushback” on the broad-based rally in risk assets, which some worry could make it harder to contain inflation. Also encouraging for investors was Powell’s repeated references to disinflation - a falling rate of inflation.
The monthly rate was negative in December, when consumer prices were 0.1% lower than in November. It was the first fall since May 2020.
“I think they do see a path where you can get that soft landing, that Goldilocks-type scenario play out,” he said.
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