The stock market sold off on Friday as Federal Reserve Chairman Jerome Powell made hawkish remarks on monetary policy at the annual Jackson Hole Symposium, even in the face of declining inflation.
was down 714 points, or 2.1%, while
fell by 2.5%, a
has decreased by 3%. Indexes are on pace to snap a two-day winning streak.
Powell emphasized that the Fed will take a policy stance that aims to contain inflation and economic growth. Recent inflation results showing a cooling of price increases, he noted, are too small a sample size to force the Fed to abandon its tightening policy right now.
“Chairman Powell threw cold water on the market’s belief that the Fed would move to mildly restrictive policy and then pause,” wrote Jeff Klingelhofer, co-chief investment officer at Thornburg Investment Management. “The Fed will not rest until they have substantial confidence that inflation is on a clear path back to 2%.”
Data released on Friday showed The Fed’s preferred measure of inflationthe core index of personal consumption expenditures rose 4.6 percent year-on-year in July, down from a 4.8 percent increase in June.
Still, rates rose on Friday. The yield on the 2-year Treasury note, which tries to predict the level of the federal funds rate a few years from now, rose about 2.4 percent, a hair below its multiyear peak last reached in mid-June.
This means that the stock market is not getting what it wanted right now. The stock market would like to see indications that the pace of rate hikes will slow down, especially since it rose this summer in hopes of fewer spikes.
Entering Friday, all three major indexes were up in double-digit percentage terms from their lows since mid-June for the year, and the market is now hoping the Fed will raise the funds rate by just half a percentage point in September. But the federal funds futures market is pricing in a 60 percent chance of a three-quarter point hike, up from about 45 percent where it was in the minutes just before Powell spoke this morning.
However, there is good news. The Fed may need to raise interest rates aggressively over the next few months, but it could still slow down after that period, especially if inflation can continue to decline. The final funds rate, or the rate at which the Federal Reserve will stop raising, is still less than 50% likely to reach 4%.
“The quiet part are [the Fed] not to say out loud is that these kinds of short-term interest rates would be really punitive for risk markets,” said James Camp, managing director of strategic income at Eagle Asset Management.
In fact, Powell left open the possibility of less than a half-point hike in September, saying the Fed would wait to see more economic data before making a decision. So in terms of aggressive rate hikes — or hawkish — rhetoric, “he barely hit the table,” wrote Gerard McDonnell, an economist at 22V Research.
Consistent with this hint of optimism is that the stock market is not falling to a frightening level right now.
The S&P 500, while falling, is still hovering just above the 4,100 level, roughly where buyers stepped in to send the index higher this summer. And it is still holding above its 50-day moving average, indicating that market participants are still confident enough about the economic and market outlook to buy at prices consistent with their recent trends.
Here are some stocks in motion on Friday:
(ticker: SGEN ) fell 5% after a report that spoke
(MRK) to acquire the company — in a deal valued at about $40 billion —are at a standstill.
stocks were flat.
( EVBG ) jumped 14% after a report that the enterprise software company is exploring a sale to the likes of an industrial company or private investment group.
( MRVL ) fell 8.3% after the data center semiconductor maker issued poor sales forecast for the third quarter, expecting revenue of about $1.56 billion — below Wall Street’s estimate of $1.58 billion.
( SNY ) rose 1% on Friday after analysts at Citi put the stock on a positive catalyst as a lawsuit settlement over the drug Zantac could be significantly less than the market’s expected $20 billion.
( FSLR ) shares were flat after being upgraded to Buy from Neutral at Bank of America.