Stocks jumped, bond yields fell and the dollar slid after Fed Chair Jerome Powell reassured markets on Friday that the central bank sees no reason to speed up interest rate hikes. To some, his words signaled the Fed could even slow down later in the cycle.
Powell was speaking in Jackson Hole, Wyoming, at the Fed's annual symposium. His much anticipated comments were viewed as measured on both the economy and policy. He also described a history of Fed actions around the inflation boom of the 1970s.
His message, as well as those of other Fed officials and the central bank's recently released meeting minutes "are really all saying the same thing — that the Fed is going to continue with gradual rate hikes to get the fed funds rate to neutral or higher," said Ward McCarthy, chief financial economist at Jefferies. "And because there's a lot of uncertainty about what neutral is, if you read between the lines, it's conceivable that you could make the case that as they approach neutrality they could go a little slower."
The neutral rate is the level at which the Fed's target fed funds rate neither stimulates nor slows the economy, and Fed officials see it as being close to 3 percent.
The fed funds rate target is currently 1.75 percent to 2 percent, and that is the rate closely tied to consumer debt, particularly credit cards, home equity lines and other adjustable-rate loans.
"It's a little like a Goldilocks speech. The economy is strong but it's not overheating ... so there's no reason to price in any [additional] hikes. They're going to keep keep raising rates," said John Briggs, head of strategy at NatWest Markets.
NatWest's chief U.S. economist, Michelle Girard, said on CNBC after Powell's speech that the question has been what will happen after the Fed gets to neutral, and Powell addressed that. "Once you get to neutral, I think the Fed gets much more cautious about continuing to raise interest rates," she said.
Strategists said the Fed appears on track to raise interest rates in September, but still unclear to some is what happens in December. Some market pros had been hoping Powell would send more signals about whether the Fed could possibly pause, taking a break from its forecast of two more rate hikes this year and three next year.
"As everyone is obsessing whether they hike in December or not, I'll say this. If they don't hike in December, they most likely will in January," said Peter Boockvar, chief investment officer at Bleakley Advisory. Boockvar said Powell's comments give the impression that the Fed does not appear to have a sense of urgency because he noted that there's no clear sign of inflation accelerating above the Fed's target of 2 percent.
Following Powell's 10 a.m. EDT comments, the Dow shot higher, gaining more than 100 points. Treasury yields dipped, with the 2-year note, most reflective of Fed policy, slipping to 2.61 percent. The 10-year note yield was at 2.83 percent. The market has been watching the spread between the two, since a flattening curve can lead to inversion, meaning the 10-year could fall below the 2-year. At one point, the two yields were just 20 basis points apart Friday morning.
"It's a Fed inversion," said Ian Lyngen, head of U.S. rate strategy at BMO. The 2-year has been influenced by the Fed rate path but the 10-year reflects low overseas rates and other concerns, like the weakness in emerging markets and Turkey.
"People are taking his more cautious commentary as a bit dovish. He said there's no clear sign of inflation accelerating above 2 percent. That's a check in the dovish column," Lyngen said. "He did acknowledge what's been going with overseas developments, by saying there are factors that in time could demand a different policy response."