US Stocks Extend Rally as Powell Says Holding Rates Higher for Long Could Hurt Growth
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US stocks have extended their winning streak and hit record highs after Federal Reserve chair Jerome Powell said that holding rates higher for long could jeopardize US economic growth.
In his prepared remarks for the Senate testimony, Powell said, “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
Powell remarked, “In light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face.”
US Stocks Rally After Dovish Fed Comments
US stocks have rallied to record highs after dovish comments from the Fed chair. Notably, while the probability of a Fed rate cut has come down and the June dot plot showed just a 25 basis point rate cut for 2024, compared to three in December, US stocks defied all pessimism to register double-digit gains in the first half of the year.
Meanwhile, while the broader markets have risen to record highs, the dismal returns of the Dow Jones Industrial Average Index and the divergence between tech and other sectors suggest underlying pain in the US economy.
Around 200 S&P 500 constituents are in the red this year even as the index is up in double digits and trading near its record highs. There has been a divergence in the fortunes of tech stocks and other sectors of the economy some of which are facing severe slowdown.
Powell Highlights Other Risks to the Economy
In his comments, Powell said, “in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face.”
Notably, the US labor market has shown signs of cooling off and the unemployment rate rose to 4.1% in June.
According to Powell, “In the labor market, a broad set of indicators suggests that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated.”
US Stocks Delivered Strong Gains in the First Half of 2024
US stocks have rallied on hopes of a soft landing in the US economy. While the economic growth has slowed down it is still quite robust and the world’s largest economy looks nowhere near a recession that many have been predicting.
Amid the stellar rally in US stocks, many brokerages have raised their target for the S&P 500. Notably, the consensus view was quite circumspect from US stocks at the beginning of 2024 and the majority of analysts saw a flattish market this year.
However, the rally in tech stocks helped catapult US stocks to record highs.
Powell on Rate Cuts
In his comments, Powell said, the Fed believes “it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent.”
While Powell said that “Incoming data for the first quarter of this year did not support such greater confidence, he added, “The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”
Notably, the minutes of the Fed’s June meeting where the US central banks held rates steady also echoed similar views.
Incidentally, the May inflation data was released shortly before the FOMC’s June press conference. The consumer price index (CPI) was flat on a monthly basis while it rose 3.3% on a yearly basis. Both the monthly and YoY changes were 10 basis points lower than what analysts were expecting.
At his press conference last month, Fed chair Jerome Powell expressed optimism over the CPI report and said, “We see today’s report as progress and as, you know, building confidence.”
Rate Cuts Could Help Propel US Stocks Higher
The odds of a September rate cut have risen and rising optimism over lower rates is also helping support the rally in US stocks. Meanwhile, as was the case in the first half, tech stocks are leading the rally and some analysts believe the trend won’t reverse anytime soon.
Commenting on markets hitting record highs, Pernas Research co-founder Deiya Pernas said, “The S&P 500 has been driven by a narrow range of tech leaders leveraged to AI tailwinds, while the rest of the market has significantly lagged.”
Pernas added, “Given the exuberance around AI, we expect this trend to continue in the near to intermediate term.”
