“Continuous Increases” to keep track of the most recent price increase; S&P 500 rally

Today’s Federal Reserve meeting statement reiterated policymakers’ plan for “continued increases” in the US central bank’s key interest rate. Since the Fed’s rate-setting committee announced a quarter-point move, the wording suggests two more hikes are likely. The S&P 500 held, then turned higher as Federal Reserve Chairman Jerome Powell spoke and continued to gain strength.

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At his press conference at 2:30 p.m. Powell sounded a little less hawkish than he had previously, but sounded more optimistic about the chances of a soft landing for the US economy.

The process of deinflation has begun, but inflation “is still very high,” he said.

“We will continue the course until the job is done.”

“The job market remains imbalanced,” Powell said. He noted that wage growth is “moderating slightly” but remains “at fairly high levels”.

However, he called it “a relief” that inflation is occurring without a significant weakening of the labor market. “I still think there is a way” to bring down inflation without a major economic downturn.

Powell talks about risk management

Powell did not rule out the possibility that incoming inflation and wage data, if benign, could prompt the Fed to increase less. However, he made it clear that the Fed should think about risk management.

“It is very difficult to manage the risks of doing too little,” which could lead to entrenching inflation, he said.

“We have no desire and no incentive to stress.” But, he added, the Fed has tools that can support growth, if needed.

March Fed meeting forecast

After the Fed meeting, markets were still betting that the Fed would pause rate hikes after next month, with the key overnight lending rate in the 4.75% to 5% range. This is lower than the 5%-5.25% range expected by federal policymakers in December.

Investors became convinced about a faster end to rate hikes after relatively weak wage growth data was released on Tuesday. As of Wednesday afternoon, markets are anticipating a 13% rise in the likelihood that today’s rate hike will be the last, according to CME Group. FedWatch page.

The odds of further increases in March and May are 39%.

Jobs and wage data are basic

On Tuesday morning, the Labor Department’s Employment Cost Index showed compensation costs rising 1% in the fourth quarter versus the third. 1.1% expected. However, compensation increased 5.1% from a year ago, up slightly from the 5% growth in the third quarter.

Economists pay close attention to wage growth for private sector workers, excluding those in paid occupations, as a good indicator of underlying wage growth. In the fourth quarter, wages in this category increased 0.9%, or an annualized pace of 3.6%. This measure excludes occupations for which the pay is commission-driven, which may be more affected by periodic highs and lows. The importance of the ECI report has increased as the Fed emphasized the need for lower wage growth to bring inflation back to the 2% target. Powell said easing wage growth to 3.5% would be enough.

However, after the impressive news about wage growth, today’s Labor Department report showed that job openings jumped unexpectedly by 572,000 to just over 11 million in December.

Powell repeatedly highlighted the surplus of job opportunities for unemployed workers as a major reason for the unusually strong wage growth. In December, the ratio of job vacancies to unemployed workers rose to 1.9 from 1.7, well above the pre-Covid peak.

With both consumer spending and manufacturing showing signs of weakness, Friday’s January jobs report will provide more evidence of whether the economy’s last major source of strength has faded. Analysts expect strong gains from 185,000 jobs, but average hourly earnings growth is expected to ease to 4.4% from 4.6% in December.

S&P 500 setup

Wednesday afternoon The work of the stock marketThe S&P 500 rose 1.1%, after trading lower before the Fed meeting ended. This follows Tuesday’s gain of 1.5% for the S&P 500 after tamer ECI data. During Tuesday’s close, the S&P 500 rose 14% in October. 12 lower closing a bear market, but still 15% below its all-time high.

On Friday, the S&P 500 peaked around 4,094, posting a third run at the clearing of 4,100 since the beginning of December. This is the key level to watch right now. The S&P 500 closed Tuesday at 4076.60, near its high for the day. With Wednesday’s rally, the S&P 500 rose past 4,120, breaking through its trading range.

Be sure to read IBD’s The Big Picture Every day to stay in sync with the market trend and what it means for your trading decisions.

As stocks rose, so did US government bonds. The 10-year Treasury yield fell 13 basis points to 3.4%, near a four-month low.

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