Wall Street’s Newfound Optimism Faces a Test as
the Fed Meets
Recent stock gains have been driven by hope that a
rate-raising cycle is close to ending. If investors decide they were wrong
about this, a drop could follow.
Joe
Rennison
By Joe Rennison
Feb. 1,
2023
Updated
9:40 a.m. ET
https://www.nytimes.com/2023/02/01/business/stock-market-federal-reserve.html
Wall Street
has welcomed a change of tone at the start of 2023: Fears of a severe economic
downturn are receding as slowing inflation raises hopes that the Federal
Reserve will soon be done raising interest rates.
In the
first four weeks of the year, this optimism has resulted in a 6.2 percent jump
in the S&P 500 and an even bigger rally among big technology stocks. Tech
stocks were among the worst performers in 2022 because of their sensitivity to
rising interest rates, and their rally now is helping to drive the broad market
higher.
The gains
have been led by a steady flow of data that shows the economy continues to
grow, while inflationary pressure is easing. On Tuesday, for example, a key
measure of pay and benefits — the Employment Cost Index — rose less than
economists had expected, and the S&P 500 jumped 1.5 percent.
But this
upbeat outlook faces a big test on Wednesday, with caution leading to a 0.3
percent decline in the S&P 500 index in morning trading.
The Fed is
widely expected to raise interest rates by just a quarter of a percentage point
later in the day, the smallest jump since March. Higher interest rates raise
costs for companies and consumers, and weigh on profits and spending, so investors
are welcoming the prospect that the central bank could start to ease off.
In some
quarters of the financial markets, the optimism has gone even further. Even
though the Fed has signaled that it will raise its benchmark rate above 5
percent, a growing number of investors are betting that the rate won’t ever get
that high.
That view
has set the stage for a battle between the Fed and the financial markets.
The stock
market gains — which enrich investors and make it easier for them to borrow —
actually undercut the Fed’s efforts to slow the economy enough and pull down
inflation. The last time stocks began to rise markedly, over the summer, the
Fed’s chair, Jerome H. Powell, had to publicly warn that the fight against
inflation was far from over. That was enough to send stock prices lower again.
Mr. Powell
will have a chance to do this again on Wednesday when he speaks to the press
after the Fed announces its decision.
“Powell is
expected to be hawkish in his press conference to counteract the trends he
still fears towards a resurgence of inflation,” noted Andrew Brenner, head of
international fixed income at National Alliance Securities.
That could
trigger a pullback in the market — and if last summer’s slump is any guide, it
could be steep. Back then, after Mr. Powell warned investors during a
late-August speech that the Fed’s effort to get inflation under control was
“unconditional,” the S&P 500 fell 15 percent before the selling stopped in
October.
Joe
Rennison covers financial markets and trading, a beat that ranges from
chronicling the vagaries of the stock market to explaining the
often-inscrutable trading decisions of Wall Street insiders. @JARennison
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