Stocks rebound after Fed chair signals slowing rate hikes

Wall Street ended a solid November with a broad market rally on Wednesday after the Federal Reserve chief said the central bank could soon begin easing its aggressive rate hikes to curb inflation.

Fed Chair Jerome Powell, speaking at the Brookings Institution, reiterated that the central bank could start slowing the pace of rate hikes as early as December, when its policymaking committee is due to hold its next meeting.

“We have to find a balance in risk management,” Powell said. “And we think slowing down (in rate hikes) at this point is a good way to offset the risks.”

Shares rose after Powell’s comments in the afternoon. The S&P 500 rose 3.1%, ending a three-day losing streak. The Dow Jones Industrial Average rose 2.2% and the Nasdaq Composite rose 4.4%.

The major indices ended November with their second straight month of gains, although they remain in the red for the year.

Powell’s comments caused government bond yields to fall significantly. The yield on the 10-year Treasury fell to 3.65% from 3.75% late Tuesday. The yield on the two-year bond, which tends to match market expectations for future Fed action, fell to 4.34%. It was trading at 4.48% late Tuesday and had peaked as high as 4.53% just prior to Powell’s speech.

“Perhaps all the market was looking for today was confirmation that we will have a smaller rate hike in December,” said Kristina Hooper, chief global market strategist at Invesco.

While citing some recent signs of a slowdown in inflation, Powell stressed that the Fed will push rates higher than previously expected and will hold them there for an extended period to ensure inflation falls sufficiently.

“History strongly cautions against easing policy prematurely,” Powell said. “We will hold the course until the job is done.”

However, the way forward is anything but certain.

“All we know is that a smaller rate hike in December is likely,” Hooper said. “We really have very little visibility as to when the break will be.”

Major indices were unstable throughout the year as the economy and financial markets grappled with stubbornly hot inflation and the Fed’s attempt to cool high prices with aggressive rate hikes.

Wall Street has been hoping that the Fed will slow the magnitude and pace of its rate hikes. It has raised interest rates six times since March, bringing them to a range of 3.75% to 4%, the highest in 15 years. The aim is to make borrowing more difficult and slow down the economy in general in order to curb inflation.

These hikes have helped mortgage rates soar, causing home sales to plummet, and increased the cost of most other consumer and business borrowing. Many economists expect the US to slide into recession next year as higher borrowing costs slow economic activity.

In his speech on Wednesday, Powell said the Fed may hike interest rates by a smaller step, just a half-point, at its December meeting, after four consecutive three-quarter-point hikes.

“Cuting interest rates isn’t something we plan to do any time soon,” Powell said. “That’s why we’re slowing down.”

Investors welcomed the prospect of more moderate rate hikes.

More than 95% of stocks in the benchmark S&P 500 index posted gains on Wednesday, with tech companies leading the gains. Apple rose 4.9% and Microsoft rose 6.2%.

Overall, the S&P 500 rose 122.48 points to 4,080.11. The index gained 5.4% in November but is down about 14% so far this year.

The Dow rose 737.24 points to close at 34,589.77, while the tech-heavy Nasdaq rose 484.22 points to 11,468.

Small company stocks also rallied. The Russell 2000 Index rose 50.03 points, or 2.7%, to 1,886.58.

Markets in Asia and Europe mostly closed higher. US crude prices rose 3%.

The economy has slowed but contains strong pockets that have given markets hope that a recession may be avoided. The government on Wednesday said the economy grew at an annual rate of 2.9% from July to September, an improvement on its original estimate.

Consumers have continued to spend despite inflation weighing on wallets and the overall job market remains strong.

The labor market remains a big focus for the Fed and investors. Its strength has helped the broader economy but makes it harder to cool inflation.

“If we get a weaker job market, we’re likely going to get weaker wage pressures,” said Scott Ladner, chief investment officer at Horizon Investments. “It’s sort of the last shoe that falls with inflation.”

Wednesday’s economic data showed signs of softening in the job market, although historically it remains relatively strong. The US government reported that job openings fell more in October than economists had expected. Human resources firm ADP reported slowing private sector employment growth in November.

Investors will get more data on the employment sector on Thursday with a report on weekly jobless claims. The widely acclaimed monthly report on the labor market will be published on Friday.