The stock market was selling off Friday, as Federal Reserve Chairman Jerome Powell made hawkish remarks about monetary policy at the annual Jackson Hole Symposium, even in the face of declining inflation.
Dow Jones Industrial Average
has dropped 714 points, or 2.1%, while the
has fallen 2.5%, and the
has declined 3%. The indexes are on pace to snap a two-day winning streak.
Powell highlighted that the Fed will take a policy stance that is meant to restrict inflation and economic growth. The last couple inflation results showing cooling price increases, he noted, are too small a sample size to compel the Fed to back off from its restrictive policy right now.
“Chair Powell threw cold water on the market’s belief that the Fed will move to marginally restrictive policy and then pause,” wrote Jeff Klingelhofer, co-head of investments at Thornburg Investment Management. “The Fed will not rest until they gain significant confidence that inflation is on a clear path back toward 2%.”
Data released Friday showed the Fed’s preferred inflation metric, the core personal consumption expenditures index, rose 4.6% year over year in July, down from June’s 4.8% increase.
Still, rates were on the rise Friday. The 2-year Treasury yield, which attempts to forecast the level of the fed funds rate a couple years from the present, rose about 2.4%, a hair below its multi-year high last hit in mid-June.
That means, right now, the stock market isn’t getting what it wanted. The equity market would like to see indications that the pace of rate hikes will slow down, especially because it has rallied this summer in hopes of fewer hikes.
Entering Friday, all three major indexes had risen double digits in percentage terms from their mid-June lows for the year, and the market now hopes that the Fed will lift the funds rate by just half a percentage point in September. But the fed funds futures market is pricing in a 60% chance of a three-quarter point hike, up from about 45%, where it sat for a few minutes just before Powell spoke this morning.
There is good news, though. The Fed may have to lift interest rates aggressively for the next few months, but it may still slow down after that period, especially if inflation can keep declining. The terminal fed funds rate, or the rate at which the Fed will stop hiking, is still less than 50% likely to go all the way up to 4%.
“The quiet part they’re [the Fed] not saying out loud is that those kind of short term rates would be really punishing to risk markets,” said James Camp, managing director of strategic income at Eagle Asset Management.
In fact, Powell did leave open the possibility of the smaller half point increase in September, saying that the Fed will wait to see more economic data before deciding. So on the aggressive rate-hiking—or hawkish—rhetoric, “he hardly pounded the table,” wrote Gerard MacDonell, economist at 22V Research.
Consistent with that hint of optimism is that the stock market isn’t falling to a scary level at the moment.
The S&P 500, while dropping, is still hovering just above the 4,100 level, roughly where buyers have stepped in to send the index higher this summer. And it’s still holding above its 50-day moving average, which indicates that market participants are still confident enough in the economic and market outlook to buy at prices consistent with their recent trends.
Here are some stocks on the move Friday:
(ticker: SGEN) tumbled 5% following a report that talks by
(MRK) to acquire the company—in a deal that has been estimated at around $40 billion—have stalled.
stock was flat.
(EVBG) jumped 14% following a report that the enterprise software company is exploring a sale to the likes of an industrial company or private equity group.
(MRVL) fell 8.3% after the data center semiconductor maker issued a tepid sales forecast for the third quarter, expecting revenue of around $1.56 billion—below the $1.58 billion eyed by Wall Street.
(SNY) rose 1% Friday after analysts at Citi put the stock on a positive catalyst watch as the settlement on a case over the drug Zantac may be significantly lower than the $20 billion expected by the market.
(FSLR) stock was flat after getting upgraded to Buy from Neutral at Bank of America.
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