After a few tense hours of morning trading, stocks erupted higher today in response to Fed Chairman Jerome Powell’s speech on the US economy. The S&P, Nasdaq Composite, and Dow all rallied. Both the S&P and Nasdaq Composite hit new all-time highs shortly before noon.
Bulls were overjoyed when Powell confirmed that absolutely nothing had changed in terms of monetary policy since he last spoke. Powell said the Fed could begin tapering its monthly bond purchases sometime this year – something the market expected heading into today’s speech. Most importantly, he didn’t provide an official taper warning, which Wall Street doesn’t believe is coming until next month when the September FOMC meeting wraps up on the 22nd.
“Powell’s speech at the Fed’s Jackson Hole symposium was in line with our expectation that he would acknowledge both the strong employment gains in recent months and the downside risks posed by the Delta variant,” wrote Goldman analysts in response to Powell’s remarks.
“We continue to believe that the FOMC’s intention is to provide advance notice in September and formally announce the start of tapering in November, assuming all goes reasonably well by then. We left our probabilities for the formal taper announcement unchanged, with November (45%) still our baseline and December (35%) or 2022 (20%) also possible in light of the risks posed by the Delta variant.”
Shortly after Powell started speaking at 10 am EST, the S&P leaped above 4,500. The index has a chance this afternoon of closing above that landmark price level for the first time ever.
Outside of the “t-word” (tapering), Powell also went full-dove on other economic issues. He reiterated that inflation is still viewed as transitory by the Fed and it should slip lower moving forward.
Powell did concede, however, that the US still has much further to go before the labor market reaches pre-pandemic levels (3.5% unemployment). We mentioned in the weeks prior that the Fed would cling to this as a reason for continued dovishness. Investors were worried that the July jobs report was “too good,” and would cause the Fed to raise rates and/or taper sooner than expected.
Today, Powell assuaged those fears with his comments on employment.
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“In short, the song remains the same; the test for ‘substantial further progress’ has been met for inflation, but not for employment, and the Delta variant poses new risks,” explained Pantheon Macro’s Ian Shepherdson.
“We still think it’s reasonable to expect the tapering announcement in November, but it could easily be delayed if the post-Delta rebound takes longer than we expect.”
So, unsurprisingly, Powell delivered a “best of both worlds” speech that pleased the market greatly. He acknowledged the recent labor recovery but warned that the Fed’s employment goal has yet to be achieved.
In doing so, Powell gave bulls the confidence to double down on their bets, even with the market looking already overstretched.
And, just one day after a terrorist attack in Kabul sent stocks scorching lower.
It ultimately proves that the “buy the dip” crowd remains very much in control of the market (regardless of what happens) thanks to the biggest bull of them all:
The Federal Reserve.