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Fed Raises 50bps, Announces Curtailing Assets; Markets Blast Off +3%

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Fed Chair Jay Powell has grown into his role over the past few years — especially regarding how he chooses his words on monetary policy while markets are still actively trading. For the second press conference in a row, Powell managed to answer questions from finance reporters and somehow facilitated a market rally by the time he was done speaking.

When Powell took the podium, at which time his opening statement was directed not to the national or global world of finance but to the American public by expressing inflation was “much too high” and the labor market “extremely tight,” the S&P 500 and Nasdaq were trading in the red. When he concluded the presser after roughly an hour, market indices had blossomed roughly +2% across the board.

And the fire had been lit! We closed Wednesday’s regular trading session way up, even after two positive days to start the week. The Dow, which had been slightly in the red early in the day, swept up +988 points at its high, closing +933 points or +2.82%. The Nasdaq, for its part, grew +401 points on the day, +3.14%. The S&P 500 gained +2.99% on the day, and the small-cap Russell 2000 went up +2.69%.

Aside from the expected 50 basis-point (bps) hike on the Fed funds rate — now to a range of 0.75-1.00%, as we were exactly five years ago — Powell announced the Fed’s plan for rolling off the excess securities from the balance sheet, which had grown to nearly $9 trillion. In this, Treasury bills and mortgage-backed securities would be allowed to expire rather than be renewed, to the tune of $30 billion and $17.5 billion, respectively, for each of the next three months. After this, each month’s reduction would double to $60 billion and $35 billion per month — which will have reduced the balance sheet roughly half a trillion dollars by year’s end.

But the real spike to the markets came when Powell dismissed the idea that a 75 bps rate hike was on the table. In fact, the Fed Chair went further, suggesting that for the next two Fed meetings — June and July (August the Fed will take a break) — 50 bps is most likely the move. This would bring the high range of the Fed funds rate to 2.00% by Labor Day. At that point, Powell said, the Fed will take a look at where things are.

For a monetary body with such a high level of difficulty remaining in front of it, Powell certainly sounded capable and confident the Fed could engineer a soft landing for the economy: bringing down inflation to preferred levels without sinking into recession, while keeping employment at or near full levels. Powell said, in fact, that there was “a good chance to have a soft landing.” Thus the spring-loaded trading activity is eating up the entire oversold market, across the board.

We shall see how the market behaves to close out this week, with more econ data expected — most especially the non-farm payrolls report for April from the U.S. Bureau of Labor Statistics Friday — along with a continued heavy supply of Q1 earnings reports hitting the tape. But it was today’s meeting the markets were waiting for, and they are happy to get what Powell delivered.

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