Powell Sees Smaller Rate Hike Ahead

November 30, 2022

Stocks moved decisively higher after the Federal Reserve chief predicted a smaller interest rate hike in December and economic data suggested earlier increases were slowing the economy as intended.  

“The time for moderating the pace of rate increases may come as soon as the December meeting,” Chairman Jerome Powell said in an appearance at the Brookings Institute Wednesday. Still, he cautioned that the central bank would need “substantially more evidence” of inflation falling before stopping rate hikes.  

The S&P 500 rose 3.1%, while the Nasdaq jumped 4.4% following Powell’s remarks. The SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ) moved alongside their corresponding indices. The indexes posted their first back-to-back monthly gains since 2021.  

The yield on the benchmark 10-year treasury note dropped 11 bps to 3.6%.

Powell pointed to concerns around a hotter-than-desired labor market and wage growth that showed “only tentative signs of easing” and remained inconsistent with the Fed’s target of 2% inflation.   Earlier today, the Department of Labor reported job openings fell to 10.3 million, leaving 1.7 jobs openings per available worker for the month, according to DOL data. In comparison, September’s openings were 10.6 million.  

“The mismatch of labor supply and demand has been an irritant to the Federal Reserve which has been striving to vanquish historically high inflation while also hoping to recover lost credibility,” Mark Hamrick, senior economic analyst at Bankrate.com, wrote in a statement emailed to ETF.com.   

Meanwhile, energy-related ETFs edged higher on news of U.S. oil stockpiles declining, increasing optimism for China’s economic improvement and the European Union’s deliberations on a Russian oil price cap.  

The Energy Select Sector SPDR Fund (XLE) added 0.5% while the iShares U.S. Oil & Gas Exploration & Production ETF (XOP) gained 0.9% during midday trading. 

“The U.S. and U.K. bans on Russian imports were token gestures, but the imminent European Union ban will significantly ratchet up the pressure,” Peter McNally, global sector lead for industrials materials and energy at Third Bridge, said in a statement to ETF.com. 

“Despite weaker Chinese demand, more durable output from Russia and a massive strategic stockpile release, visible inventories of crude oil and refined products are low by historical standards,” he added. “Right now, the outlook for demand is dominating price action.” 

Still, analysts at Bank of America earlier this week said investors’ expectations may be too optimistic. “Markets are in denial, particularly equities,” they wrote in a note on Monday. 

 

Contact Shubham Saharanat[email protected]   

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