Stocks Surge After Powell Says Fed Not Afraid To Raise Rates Further If Higher Inflation Persists

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Top Line

The stock market jumped after Federal Reserve Chairman Jerome Powell promised in testimony before the Senate on Tuesday that the central bank would not hesitate to raise interest rates higher than expected if inflation persists.

important facts

Stocks were lower before Powell’s testimony — with the Dow Jones Industrial Average falling 250 points, but all three indexes narrowed losses by the afternoon after his comments.

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The Dow remained slightly positive, while the S&P 500 and Nasdaq Composite rose 0.3% and about 1%, respectively.

Powell, who is expected to win a second term as Fed chairman, faced questions at his Senate confirmation hearing about how the central bank would adjust monetary policy to tackle inflation.

While the economy is expanding at its “fastest pace in many years” and the labor market remains “strong,” according to the Fed chairman, challenges such as high inflation and “the mismatch between supply and demand” remain.

While Powell predicted that supply chain issues would return to normal later this year, which should help ease inflationary pressures, he said the Fed would not be afraid to raise interest rates higher than expected if inflation remained high. happened.

The Federal Reserve previously indicated at its policy meeting last month that there was likely to be three hikes in interest rates this year, with the first coming in March.

Important Quote:

“If we have to raise interest rates further over time, we will,” Powell said. “We’ll Use Our Tools to Get Back Inflation” [to long-term targets]

Main background:

Stocks have made a great start in 2022 after delivering stupendous returns last year. After rising 27% in 2021, the benchmark S&P 500 index is down more than 3% so far in the first few weeks of this year. Meanwhile the Dow is down about 2% so far in 2022, while the tech-heavy Nasdaq is down about 6%.

Opposite:

“I worry that the Fed’s extraordinary response to the crisis could become the new normal for monetary policy,” Senator Pat Tomei (R-Pa.), who supported Powell’s reappointment, warned during the hearing. “I worry that the Fed’s new structure may have contributed to the Fed being behind the curve as we keep inflation running at a 39-year high.”

What to look for:

As corporate earnings season kicks off this weekend, several large banks have started reporting financial results from Friday.

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