Stocks rose on Friday heading for a winning week as Federal Reserve Chairman Jerome Powell prepared the markets for the central bank to pull back on some of its monetary stimulus, saying it's likely to start tapering its $120 billion in monthly bond purchases this year.
The Dow Jones Industrial Average gained 242.68 points, or 0.6%, to 35,455.80. The S&P 500 rose 0.8% to hit a new high and closed at 4,509.37. The Nasdaq Composite added 1.2%, also hitting a new record during the session, closing at 15,129.50.
The three major stock averages closed the week in the green. The Dow finished up 0.9%, while the S&P 500 added 1.5% and the Nasdaq Composite gained 2.8%.
The 10-year Treasury yield, which ran up this week into the Powell speech, eased slightly after the Fed chief's remarks as he made clear that interest rate hikes would not immediately follow after tapering was over.
"The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test," Powell said.
Powell also said inflation is solidly around the central bank's 2% target rate, one of the goals of the Fed's dual mandate. It has "much ground to cover" to reach its other goal of maximum employment, however, though there has "been clear progress" toward it, Powell added. The Fed has used the term "substantial further progress" as a benchmark for when it will start tightening policy.
Based on statements from other central bank officials, a tapering announcement could come as soon as the Fed's Sept. 21-22 meeting.
The financial markets' reaction Friday is a sign that the central bank has successfully prepped investors so far for a removal of its $120 billion a month in bond buying and may avoid a "taper tantrum" like the one that rocked markets temporarily at the end of 2013. Markets seem relieved the Fed isn't planning to raise rates soon, said Michael Arone, chief investment strategist for the US SPDR Business at State Street Global Advisors.
"Interest rate hikes are far, far away, and investors are happy about that," he said. "I think Powell deserves some credit for navigating the tapering of assets, avoiding a tantrum. The market seems well prepared for the start of tapering."
The speech also signaled the Fed isn't nearly as nervous about prices as some in the market and Washington are, said Adam Crisafulli, founder of Vital Knowledge.
"Powell spends the bulk of the speech pushing back on inflation concerns," he said of the speech, adding that the Fed chairman "pushes back on rate liftoff worries, telling markets that the threshold for rate hikes is much higher than tapering."
Cliff Hodge, chief investment officer for Cornerstone Wealth, noted that Powell remained firm in the Fed's view that elevated inflation is transitory, despite the Commerce Department earlier Friday reporting the largest year-over-year personal consumption expenditures increase since 1991. The PCE Index rose 4.2% in July from the same time last year and 0.4% from the previous month.
"He successfully threaded the needle in communicating that tapering will likely begin this year, while reinforcing the notion that tapering does not mean tightening," Hodge said. "We believe that barring further setbacks from the delta variant, that September will likely produce a blowout jobs number and set the table for the official tapering announcement at the September FOMC meeting."
Energy stocks led the S&P 500, after being among the hardest hit on Thursday. Occidental Petroleum climbed 6.9%, Cimarex Energy rose 6.5% and APA Corp rose 5.9%.
Automakers got a boost with Ford and General Motors rising 3% and 2%, respectively. Travel stocks, including air carriers, cruise lines and hotels were lifted as well. The Invesco Dynamic Leisure and Entertainment ETF gained 2.27%.
Shares of Workday surged 9.1% after reporting strong currently earnings and subscription revenue that jumped 23% from last year, while Peloton shares dropped after the exercise equipment company's fourth-quarter financial results missed Wall Street estimates. Peloton fell 8.5%.
The indexes are on track to end the month higher. The Dow is up 1.4% in August. The S&P 500 is 2.6% higher, and the Nasdaq Composite is up 3.1% this month.
— Jeff Cox, Patti Domm and Yun Li contributed to this report.