What Fed Chair Powell can say to keep the stock-market rally going — or kill it

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Whatever Federal Reserve Chairman Jerome Powell says when he steps up to the podium on Wednesday will likely have ramifications for financial markets.

But what do equity investors need to hear from the Fed chair to keep the rally going? Market strategists who spoke with MarketWatch have a few thoughts.

Most important, anything Powell says to harden expectations for a 50 basis-point interest-rate hike in December would likely push prices for stocks and bonds higher, said Jake Jolly, senior investment strategist at BNY Mellon. Bond yields fall as prices rise, and vice versa.

On the other hand, anything that leaves investors with the impression that another jumbo interest-rate hike remains a possibility in December could have the opposite effect.

“What’s going to be most critical is how much [Powell] tells us about December,” Jolly said.

“If Chair Powell is relatively quiet and doesn’t want to discuss his thinking, to me that could be hawkish,” Jolly said. “That means it will remain a very data-dependent decision.”

“Markets like certainty, they don’t like ‘wait and see,’” he said.

Read: Another jumbo Fed rate hike is expected this week — and then life gets difficult for Powell

Powell and his fellow policy makers are widely expected to deliver a fourth straight 75 basis point, or 0.75 percentage point, rate hike when they finish up their two-day meeting on Wednesday. Investors have focused on the outlook for the December meeting.

Derek Tang, an economist at Monetary Policy Analytics in Washington, told MarketWatch that any sign that Powell is holding on to the possibility of another 75 basis point hike in December and rate increases into the first or second quarter of next year would likely “really hit stocks” and lead to a resumption of this year’s equity selloff, which sent the S&P 500
SPX,
-0.75%
,
Dow Jones Industrial Average
DJIA,
-0.39%

and Nasdaq Composite
COMP,
-1.03%

into a bear market.

Even if Powell signals that the Fed will almost certainly slow the pace of interest-rate hikes beginning in December, the intervening period will still be fraught with event risk for stocks.

Investors will receive two months’ worth of inflation data between the close of the Fed’s two-day November policy meeting on Wednesday and the start of its December meeting on Dec. 14. And there’s also the question of U.S. midterm elections, which are set for Nov. 8, as well as the possibility that expectations for 2023 corporate earnings could start to falter, as Morgan Stanley’s Michael Wilson has repeatedly pointed out.

If Powell truly wants to convince investors that the Fed is intent on slowing the pace of interest rate hikes to give the economy and markets more time to adjust, he will need to find a way to do so while simultaneously communicating that battling inflation remains the central bank’s priority.

“Chairman Powell will need to convince traders and investors alike that the Fed is still resolutely determined to curtail inflation, but that it can be accomplished with a steady dose of lower rates,” said Quincy Krosby, chief global strategist at LPL Financial.

See: The Dow is on track for record October as Big Tech tanks: What’s next for stocks as investors await Fed clues

As always, risks will be concentrated within Powell’s question-and-answer session, which isn’t as tightly choreographed as the opening statement. It’s possible Powell could misspeak or say something that rubs investors the wrong way.

“There’s the statement, which is carefully planned, and then there’s the Q&A, where it’s easier to make a mistake and there’s a larger margin of error,” said Tang at Monetary Policy Analytics.

While inflation continues to run near its fastest pace in 40 years, the Fed does have some progress to report, market strategists said.

According to the latest reading of the personal-consumption expenditures price index released on Friday, core prices, which strip out volatile food and energy prices, accelerated more slowly in September compared with the prior month.

However, on a year-over-year basis, they still increased at a rate of 5.1% last month, compared with 4.9% in August.

But on the brighter note, wage growth slowed during the third quarter, according to Friday’s reading of the employment cost index. Wages rose 1.2% last quarter after increasing 1.3% in the quarter ended in June.

It’s possible Powell could use the slowdown in wage growth to justify moderating the pace of rate hikes, market strategists said.

Expectations about the size of the Fed’s December hike have shifted since a report in The Wall Street Journal on Oct. 21 said policy makers were barreling toward a 75 basis point rise in November but were poised to debate the size of a December increase.

But so far, the Fed’s messaging has left plenty of room for doubt, and this has been reflected in interest-rate futures markets.

Fed funds futures traders are pricing in 44.6% odds of a 50 basis point hike in December, while odds of a 75 basis point hike stand at 49.5%, according to the CME’s FedWatch tool.

This suggests investors are waiting on Powell to confirm that the downshift is indeed happening. After being repeatedly burned over the past year, including when Powell tanked stocks by delivering a terse and unexpectedly hawkish speech in Jackson Hole, Wyo. in August, it’s perhaps unsurprising that some investors remain skeptical.

According to a count maintained by strategists at Deutsche Bank, the Fed has faked out markets with hopes for a policy pivot nearly half a dozen times over the past year.

Although stocks have tended to rally during Fed decision days this year (with the central bank’s September meeting presenting a notable exception), markets have tended to be volatile in the days after the meeting, Jolly pointed out.

Any relief afforded stocks by Powell’s statement could also be short lived. After the November meeting is over, it’s likely investors will turn their attention once again to trying to ascertain where benchmark interest rates will peak, and how long they will need to stay there before the Fed can pivot back toward cutting rates again, Jolly said.

Ultimately, investors will need to wait until December before they receive another update from the Fed’s “dot plot,” which is a collection of senior Fed officials’ expectations for the path that interest rates might take.

U.S. stocks are trading lower on Monday, which is the last trading day for October, with the S&P 500 down 0.6%, the Dow Jones Industrial Average down 0.2% and the Nasdaq Composite off 0.9%. But all three major indexes are still holding on to gains for the month, with the Dow on track to record its best October ever, and best monthly performance since the 1970s.

—Vivien Lou Chen contributed to this article.

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