Fundamental Analysis

Equities Climb amid Absence of Policy Clues in Powell’s Speech

  • Fed Chair Jerome Powell avoided discussing rate policy in his speech.
  • Powell emphasized that the Fed’s independence was crucial to fight inflation.
  • US inflation for December is expected to be 6.5%, down from 7.1% in November.

Equities climbed on Wednesday while the dollar held steady as investors awaited US inflation figures for clues on the Federal Reserve’s interest rate policy.

In a speech on Tuesday, Fed Chair Jerome Powell avoided discussing rate policy but stated that the Fed’s independence was crucial for it to fight inflation, which helped US markets close higher.

However, Powell stated that the Fed must be able to act as it sees fit in controlling inflation, like raising interest rates, even if doing so results in slower growth and more unemployment.

The Federal Reserve is tasked by law with preserving maximum employment and stable prices, and Powell claimed that this principle is “clearly understood and universally supported” in the United States.

According to Saxo strategists, equity markets rejoiced at the absence of any specific indication on policy because there was some expectation that Powell would likely push back on loosening financial conditions.

Actual and forecast US inflation (Source: Bureau of Labor Statistics, Bloomberg)

The Thursday announcement of the consumer price index (CPI) for the United States will be the center of investor attention. According to the data, headline annual inflation for December is expected to be 6.5%, down from 7.1% in November. This would be in line with forecasts for declining inflation in 2023.

The data released on Thursday will be crucial in determining how the Fed will likely change interest rates at its next meeting at the beginning of February.

After four consecutive 75 bps rate increases in 2022, the US central bank increased interest rates by 50 basis points in December, but it has reaffirmed that it will keep rates higher for longer to contain inflation.

According to Stephen Wu, an economist at the Commonwealth Bank of Australia, investors expect the upcoming inflation report to show more deceleration, potentially allowing the Fed flexibility to decrease the rate of interest rate increases.

Other Fed members have expressed support that the central bank must continue aggressively raising interest rates to control inflation.

Federal Reserve Governor Michelle Bowman stated on Tuesday that to tackle excessive inflation, the central bank would have to hike interest rates even more. This would probably result in a weaker labor market.

Hopes for a robust economic recovery for China following the COVID-19 outbreak also boosted market optimism.