Prior to today, the last three times Fed Chair Jerome Powell has spoken, the market sold off sharply. There was hope that he might be a bit less hawkish, and when that didn't happen, investors reduced their market exposure.
This time the market wasn't particularly optimistic about what Powell might say. It was unlikely that he was going to add much to the comments he made after the last Fed interest-rate decision. That is pretty much what happened. He indicated that it was likely that the Fed would slow the pace of rate hikes, and we have already priced in a half percentage point hike for several weeks now. He also indicated that it was likely that hikes would continue for longer and could go higher, but he did mention the potential for a soft landing.
One new element Powell did mention was that the battle against inflation was shifting away from some of the things that were the biggest problem, like food and energy, and was now focused more on wages. Wages are the main issue feeding inflation now, and there is still work to be done in bringing down employment to deal with it.
So, if Powell didn't really say anything new, then why did the market respond so favorably? The main reason is that expectations were low. It was anticipated that he would continue to sound negative and hawkish, but the tone of his comments was a little more upbeat and optimistic. He seemed to indicate that the Fed felt that it had a solid plan in place and were confident it would eventually work.
Another thing that helped to produce the sharp move higher was that there wasn't a big runup into the news. There was no "sell the news" pressure. Market players were not prepared for a strong positive response and had to scramble to add exposure.
The issue now is to what extent the market can build on this strength. There is some nearby technical overhead, but the bullish narrative has been that positive action into the end of the year combined with underinvestment would produce some sustained movement.
Not much has changed today, as far as the economy and what the Fed will do, but there is a little more certainty and a little more optimism, and that is all that is needed to trigger some aggressive buying.
Have a good evening. I'll see you tomorrow.
