Pre-market actions: Powell revives hopes of a Fed pivot. It’s a bad thing

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Federal Reserve Chairman Jerome Powell made investors very happy on Wednesday. US stocks surged after the central banker delivered a speech that made clear the Fed would ease the historically high pace of interest rate hikes at its next policy meeting in December.

But investors expecting a full pivot may be putting the cart before the horse. Powell’s admission that “the way forward for inflation remains very uncertain” means that rate hikes could be here for a while.

What is happening: Investors are watching closely for any signs that the Fed may slow or pause its painful path of rate hikes, intended to combat persistent inflation. But their search for signs has led to a hopeful distortion of the facts: Powell says “moderate” and investors intend to “pivot.”

“The time to moderate the pace of rate hikes could come as early as the December meeting,” Powell said in a speech at the Brookings Institution, his last public appearance before the central bank enters a blackout period before its December 13-14 policy development meeting. .

Investors celebrated. The S&P 500 ended its three-day losing streak and closed up 2.7% on Wednesday. The Dow Jones has officially entered a bull market. The 10-year Treasury yield also eased on the news.

Market bounces can lead to a counterproductive easing of financial conditions and stimulate the economy, which is the opposite of what the Fed is trying to do with its tightening policy. Powell attempted to do some hawkish “jawboning” by signaling that the FOMC would continue to climb through 2023, but investors didn’t seem to care.

“Inflation by any measure remains far too high,” Powell said. “It will take a lot more evidence to confirm that inflation is coming down.”

In search of Atlantis: Investors are seemingly dependent on the ups and downs of any perceived change in Fed thinking, leaving markets excessively volatile. This is exactly what the Fed does not want to happen.

St. Louis Federal Reserve Chairman James Bullard warned this week that the stock market is underpricing the risk of a continuously aggressive Fed.

This is not the first time that investors have rushed to the markets thinking there will be a pivot from the Fed. The last time the market ran with a similar narrative over the summer, it didn’t go so well. Powell responded with a very hawkish speech in Jackson Hole that sent markets plummeting. The Fed ended up proposing further hikes in the months that followed.

The bottom line: The Fed has raised its benchmark lending rate six times this year in an effort to discourage borrowing, cool the economy and bring down historically high inflation which peaked at 9.1% during the month. summer and has since slowed to a still uncomfortably high 7.7%, according to the latest consumer price index.

Even if interest rate hikes ease a little, they will remain high, and economists widely expect the US economy to experience a recession next year. Powell said Wednesday there was still a chance the economy would avoid recession, but the odds are slim. “To the extent that we have to keep rates higher for longer, that’s going to narrow the path to a soft landing,” he said.

The House on Wednesday approved legislation to avert a rail shutdown that could cost the US economy $1 billion in its first week alone.

The resolution, which passed 209-137, would force unions to accept a tentative agreement between railroad managers and workers that was reached earlier this year. It would also make an impending strike illegal. This follows a grave warning from President Joe Biden about the economic danger posed by Congressional inaction.

Without legislation, a railroad strike could become a reality as early as December 9, causing shortages, soaring prices and the shutdown of factory production. It could also disrupt commuter rail services for up to seven million passengers and the movement of 6,300 railcars of food and agricultural products a day, among other things, according to various business groups.

This potential supply chain crisis has yet to be fully eliminated. The bill is now heading to the Senate. But the bill is likely to pass – Congress has voted to stop or end rail strikes in all cases since the 1960s.

Another, less likely arrangement: Separately, the House agreed to add a provision to the rail deal that would increase the number of paid sick days from one to seven. The additional sick leave was added at the insistence of progressive House members who had threatened to scuttle the rail deal bill if the provision was not included.

The provision was added using an arcane tactic that will allow the Senate to pass the original rail deal without including the sick leave measure.

There is unlikely to be support for the provision in the Senate: White House press secretary Karine Jean-Pierre told reporters on Wednesday that the Biden administration does not believe the Senate has the 60 votes needed to pass sick leave measure.

The number of job openings in the United States fell in October.

There were 10.3 million jobs available last month, down from nearly 10.7 million in September, according to the latest monthly Job Openings and Turnover Survey (JOLTS) released Wednesday by the Bureau of Labor Statistics.

But the labor market still remains historically tight despite the Federal Reserve’s efforts to cool demand and lower inflation.

“High job vacancies during an economic downturn imply that the labor market may remain tight for some time,” wrote Jeffrey Roach, chief economist at LPL Financial in a note Wednesday. “Companies could hoard workers even if the economy goes through a recession.”

There were about 1.7 job openings for every job seeker in October, down from 1.9 in September, according to BLS data.

Bad news: “The mismatch in labor supply and demand has been an irritant for the Federal Reserve, which has struggled to beat historically high inflation while hoping to regain lost credibility,” Mark said. Hamrick, senior economic analyst for Bankrate, in a statement.

Fed Chairman Jerome Powell said Wednesday he was no longer optimistic about getting workers back into the workforce and taking open jobs to correct the mismatch between available jobs and workers. , driving up wages. “Excess retirements could now account for more than two million of the three and a half million labor shortages,” he said.

The government’s jobs report for November is due Friday morning.

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