Federal Reserve Chair Jerome Powell sparked a massive stock market rally when he signaled the central bank is not expecting to raise rates as aggressively as some investors feared and that it still expects a soft landing for the economy. The question is how much steam is behind that rally, and strategists say for now stocks could head higher, but volatility will remain. Strategists added, though, that the Fed itself may not be as much a source of volatility as it had been and that could help steady markets. Stocks surged, with the S & P 500 gaining 3% to 4,300, and the Nasdaq Composite up 3.2%. Bond yields fell, with the 10-year Treasury at 2.94% late in the session, after touching 3% earlier in the day. "From the rates market, the most important thing that [Powell] did today was he started to provide some forward guidance. He basically said we're going to hike 50 basis points at the next two meetings, and we're not actively considering a 75 basis point hike," said Mark Cabana, head of U.S. short rates strategy at Bank of America. "That just helped narrow the range of uncertainty out there, and that matters a lot ... and it helps reduce volatility." Cabana noted that Powell said the central bank wants to stop being a source of volatility. "They know one of the reasons the markets have been so volatile is that they have not been able to provide forward guidance," he said. "Rates volatility comes down as the Fed hikes, because they give more forward guidance. If the Fed has any hope for a soft landing, they need that forward guidance." The Fed raised its target federal funds rate by a half point Wednesday, to a range of 0.75% to 1%, and said it remains focused on inflation. Policymakers also note there are risks to the economy and that they are monitoring the impact of the war in Ukraine and China's Covid-related lockdowns. Some traders had been betting the Fed would boost rates by 75 basis points in June, following this half-point increase. But Powell ruled that out for now, adding the Fed would consider a couple more 50 basis point hikes. The futures market had been pricing three more 50 basis point hikes, on top of Wednesday's hike. "I think the market was oversold and looking for a reason to pop, but I don't think we fully know whether a recession is off the table, and as a result, the only thing I can say is this at least for now is a relief rally," said Sam Stovall, chief investment strategist at CFRA. Stovall had expected a rally if the Fed met investor expectations, but Powell's comments clarified the central bank is not as hawkish as the market had been expecting. "A lot of what Fed Chairman Powell was talking about is that monetary policy can only go so far. There are some things that we cannot control, such as what is going on in Ukraine, supply chain disruptions and the halving of global grain output," he said. Stovall said he expects stocks that were most oversold to continue to have the most upside potential, and candidates for bigger gains are the beaten-down names in consumer discretionary, technology, and communications services sectors. State Street Global Advisors chief investment strategist Michael Arone said the Federal Reserve delivered on its guidance and eased investors' concerns about the path of future rate hikes. "I think there's three things" in Powell's comments, Arone said. "They're not actively considering 75 basis points. There's some evidence that inflation may have peaked. And thirdly, he acknowledged it won't be easy, but he thinks a soft landing is still possible because households, businesses and the labor markets remain in good shape." But Arone said the market will remain unsteady. "You still have the China zero Covid policy. You still have the Ukraine-Russian conflict. We'll still get inflation data," he said. "I do think there are still a number of hurdles that could continue this volatility. The market sentiment remains shaky, but at least for today the investors feel much more confident in the direction the Fed is headed." Arone said the market also was soothed by Powell's comments that the balance sheet would be reduced in a predictable manner. The Fed is going to start moving toward an eventual reduction of $95 billion a month in June. "He gave himself a timeline and he gave himself plenty of wriggle room," said Arone. "He delivered on what they provided in forward guidance. ... It was everything investors wanted to hear. Bond yields are lower and stocks are up sharply."
U.S. Federal Reserve Board Chairman Jerome Powell speaks during his re-nominations hearing of the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill, in Washington, U.S., January 11, 2022.
Graeme Jennings | Reuters
Federal Reserve Chair Jerome Powell sparked a massive stock market rally when he signaled the central bank is not expecting to raise rates as aggressively as some investors feared and that it still expects a soft landing for the economy.