Powell's dovish Jackson Hole speech drives Dow higher, pushes S&P 500 and Nasdaq to intraday records

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By Mark DeCambre and Jack Denton

The S&P 500 and the Nasdaq Composite rose to intraday records late-morning Friday, after Federal Reserve Chair Jerome Powell said at the Jackson Hole central bankers’ symposium that he supported scaling back the central bank’s bond purchases this year, though he did not signal specific timing.

Powell also emphasized the belief held by a number of Fed members that surging inflation would be a short-lived phenomenon as it has been largely caused by supply chain bottlenecks and increased demand as the economy recovers from the pandemic.

How are stock benchmarks trading?

Equity benchmarks slipped on Thursday after three Fed officials–Robert Kaplan, James Bullard, and Esther George–advocated for tapering of the central bank’s accommodative stance sometime this year. The Dow fell 192 points on Thursday to close at 35,213, while the S&P 500 declined 0.58% and the Nasdaq Composite moved 0.64% lower.

What’s driving market?

Powell, in the closely followed speech on Friday, said he advocated tapering the Fed’s purchases of $80 billion of Treasurys and $40 billion of mortgage-backed securities each month but was vague about the timetable.

“Powell is a dove and wants more time to assess the data on employment…the reasons for using this speech to signal the taper have reduced since the July FOMC,” wrote Neil Wilson, chief market analyst at Markets.com, in a emailed research note.

The Fed chair said the U.S. central bank “will be carefully assessing incoming data and the evolving risks,” perhaps offering himself more wiggle room before the Fed’s Sept. 21-22 meeting to digest further evidence of the health of the economy, including a coming jobs reports for August.

Powell “stressed that while the ‘substantial further progress’ test has been met for inflation, it has not yet for the employment mandate”, Wilson noted. Powell stressed that clearly there has also been progress toward maximum employment, the Markets.com analyst also wrote.

The tapering question is a significant one for market participants because the monthly asset purchases have added critical liquidity to markets since the economy plunged into recession last year during the coronavirus pandemic.

Powell’s remarks come after a reading of the U.S. rate of inflation, based on the personal consumption deflator, rose again in July and drove the increase over the past year to a 30-year high, pointing to fresh strains on businesses and consumers as the economy recovers from the pandemic.

The so-called PCE price index, or personal-consumption expenditures, the Fed’s preferred measure of inflation, climbed 0.4% in July, government figures show. It was the fifth big increase in a row and the 12-month increase in PCE to 4.2% from 4%, was the highest since 1991. However, the core rate, excluding food and energy prices, over the past 12 months was unchanged at 3.6%, keeping it at a 30-year high.

Powell’s comments also followed those from Fed officials who had joined the chorus of voices in favor of tapering soon. In an interview with CNBC, Philadelphia Fed President Patrick Harker said he didn’t think asset purchases was “doing a whole lot right now.” Cleveland Federal Reserve Bank President Loretta Mester, also speaking to the network, said she would be comfortable with the central bank laying out its taper plans in September, and winding down purchases by mid-2022.

A third policy maker, Atlanta Fed President Raphael Bostic, told CNBC that the U.S. economy is “very close” to the substantial progress benchmark needed to start tapering its asset purchases, but “a lot depends on what happens in the next couple of months.”

Powell walked a fine line between pointing to tapering bond purchases and divorcing that move from ultimately normalizing interest rates and assuaging market bulls who have been fearful that an easy-money regime would be at an end too soon. Still, some fear that there are dangers inherent in Powell’s positioning.

Jeremy Lawson, chief economist at Aberdeen Standard Investments, said that Powell’s speech “was yet more proof that transparency does not mean clarity. And the void that the Fed’s ambiguity leaves comes at a price.”

“There are good reasons why the Fed would want some ambiguity…But if the Fed isn’t even being clear about what it is targeting and how it will behave under different circumstances then they just create layers of uncertainty over other layers of uncertainty,” Lawson wrote, in emailed remarks.

“That forces investors into a cottage industry guessing game about what path they might take, leads to more rather than less volatility and wastes enormous amounts of resources, the economist wrote.

In other data, personal incomes climbed 1.1% in July, while spending increased 0.3% in July; and the U.S. international trade deficit in goods dropped 6.2% in July to $86.4 billion.

Meanwhile, the University of Michigan’s consumer-sentiment index slipped to 70.3, versus the 70.7 expected and below the 81.2 earlier reading, indicating waning consumer optimism amid the spread of the coronavirus delta variant.

-Mark DeCambre

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(END) Dow Jones Newswires

08-27-21 1135ET

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