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Topline
Despite a steep crash at the end of last week, stocks rallied to new highs Tuesday as Federal Reserve Chair Jerome Powell insisted during a congressional hearing that recent price spikes will only be temporary, easing concerns that unexpected interest rate hikes could tank the stock market.
Federal Reserve Board Chairman Jerome Powell testifies during a hearing before the Senate Banking … [+] Committee.
Key Facts
The tech-heavy Nasdaq jumped 0.8% to 14,253 points Tuesday, surpassing a closing high from June 14.Â
Netflix, Amazon and Facebook were among stocks heading up the indexâs gains, climbing 3%, 2% and 1.9%, respectively.
Meanwhile, the Dow Jones Industrial Average jumped 69 points, or 0.2%, to 33,945 points, about 2.3% below an all-time closing high on May 7, while the S&P 500 rose 0.5% to 4,248 points, about 0.1% from its last closing high, also on June 14.
Testifying before the Houseâs coronavirus subcommittee Tuesday afternoon, Powell reiterated the Fedâs longstanding stance that rising inflation in recent months is due to transitory (or temporary) factors, including supply bottlenecks, a rebound in spending and very low inflation readings from early in the pandemic.Â
Powell also declared the Fed will not raise rates preemptively based on inflationary fears alone, instead saying the central bank will only react to âactual evidence of actual inflation,â which Fed officials expect could lead to interest rate hikes in 2023.
Stocks climbed broadly after Powellâs Tuesday remarks, with the S&Pâs consumer discretionary, technology and communications sectors leading the marketâs gains.
Crucial Quote
âA pretty substantial partâor perhaps allâof the overshoot in inflation comes from categories that are directly affected by the reopening of the economy, such as used cars and trucks, airplane tickets, hotel prices . . . things that we would look to stop going up and ultimately to start to decline as these situations resolved themselves, they donât speak to a broadly tight economy,â Powell said Tuesday. âWe at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.â
Key Background
Rising rates and accelerating economic growth this year have spurred a stock-market rotation away from growth stocks, like those in technology, to cyclical and value-leaning slices of the market, such as energy and financial stocks. âGrowth has underperformed the market, but this dynamic may not last forever,â Morgan Stanley analysts wrote in a research note last week, calling inflation the âmost proximateâ risk for stocks and saying any indication the Fed will raise interest rates to combat rising prices could rock the marketâand hit tech stocks the hardest. The Dow finished its worst week since October on Friday, as traders worried over impending Fed hikes. Powellâs Tuesday comments, however, make it clear the Fed isnât looking to raise rates anytime soon.
Tangent
Consumer prices rose 0.6% between April and May and 5% over the 12 months ending in Mayâthe highest annual rate in 13 years and more than economists were expecting. âWhilst it is true that the pandemicâs economic disruption has radically changed consumersâ spending patterns around the world, raising concerns around increased inflation, these levels are what we would expect and represent a short-term trend that will correct over time,â Oliver Wright, a global consumer goods and services lead at Accenture, said of the report.
Further Reading
S&P 500, Nasdaq Hit Record Highs As Tech Stocks Rally Ahead Of Fed Decision (Forbes)
Dow Finishes Worst Week Since October As Traders Worry Fed Hikes Coming Soon (Forbes)