S&P 500 surges to fresh intra-day record levels above 4640 as Powell speaks

US equity markets saw upside in the immediate aftermath of the latest Fed rate decision, with the S&P 500 rallying to fresh record intra-day levels just shy of the 3640 mark. The Fed held the federal funds target range at 0.0-0.25% as expected, and, also as expected, announced that it would taper its QE programme, which is currently buying bonds at a pace of $120B per month, by $15B from mid-November and then again in mid-December. Thereafter, the Fed said that it would likely be appropriate for further reductions in the pace of bond-buying programme in 2022 to continue at a similar pace, though the Fed would be prepared to adjust as necessary.

The dovish surprise that appeared to support equities appears to have been the fact that the Fed did not adjust its language regarding how it views inflation as “hawkishly” as some might have expected. The bank maintained its description of inflation being largely driven by transitory factors, though did add another sentence going into a little more detail as to the drivers (reopening, supply chain problems) of high inflation. Some might have expected the bank to say something like “inflation is partly driven by transitory factors”.

Fed Chair Jerome Powell is currently conducting his usual post-monetary policy announcement press conference and equities seem to be liking what they are hearing, with the S&P 500 having now pushed to the north of the 4640 level and is eyeing a test of 4650. Taken in sum, Powell’s remarks on the labour market, inflation and interest rates seem to be more dovish than what the market may have been expecting; Powell doubled down on the classification of inflation as expected to be transitory, saying he expects it to abate in Q2 or Q3 next year. He also said that, as a result, the Fed is willing to be patient when it comes to rates. This isn’t the sort of language one would expect to hear from a man who is about to hike rates as soon as June 2022, as money markets are currently pricing.

Still, Powell has been hedging himself; he reiterated past comments that he does think the risk of more persistent inflation has risen and that the Fed is “positioning itself for a range of possible outcomes”, which could include being faced with a trade-off between inflation and employment (i.e. needing to hike before the jobs market has returned to full employment because inflation is too high). Still, Powell said he thinks the labour market can recover fully by mid-2022, which is conveniently also the period after which if inflation is still high, the Fed would start hiking rates (in other words, ignore high inflation until employment recovers, then start to address it!). These potentially more hawkish scenarios, under which rate hikes would likely begin in mid-2022 are not being presented as the Fed’s base case. Net-net, markets seem to be interpreting Powell tone/remarks as dovish, hence the upside seen in stocks and the broad weakness being seen in the US dollar.