Summary:
- U.S. stocks ended higher following a volatile trading session after Federal Reserve Chair Jerome Powell's speech on the possibility of raising interest rates to control inflation.
- The Dow gained three-quarters of 1 percent, the S&P 500 rose two-thirds of 1 percent, and the Nasdaq added close to 1 percent.
- Powell expressed optimism about decreasing price pressures but highlighted the need for further efforts to bring inflation down to the Fed's target.
- Investors reacted to Powell's comments, with expectations of a rate hike in November increasing, as indicated by the CME Group's FedWatch tool.
- Gap's stock surged 7% after beating second quarter profit estimates, while Nordstrom's stock dropped 8% as the department store chain maintained its forecasts.
U.S. stocks finished higher Friday after a volatile trading session. The moves came after Federal Reserve Chair Jerome Powell said the central bank may need to raise interest rates more to contain inflation. The Dow gained three-quarters of 1 percent. The S&P 500 rose two-thirds of 1 percent, and the Nasdaq added close to 1 percent. In an annual address in Jackson Hole, Wyoming, Powell said he was cheered by decreasing price pressures, but made clear the Fed may have more work to do to get inflation down to its two percent target.
We have tightened policy significantly over the past year. Although inflation has moved down from its peak, a welcome development, it remains too high. We are prepared to raise rates further, if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective. Riverfront Investment Group senior market strategist Rebecca Felton said the comments met her expectations. In terms of Chairman Powell's comments today, we were not surprised. We have been of the belief that the Fed was going to have to keep rates higher for longer. You would think of that two percent inflation target, which he did reiterate today, and that's still well below the core PCE numbers, which we know is something that they look at.
The next report for that, the July report, will come out next week, and it is still forecast to be above four percent. With respect to his comments today and continuing hawkish leanings, I believe that it was very clear that he would expect to see softer labor market conditions as well as softer economic trends before they might determine to reverse course. Most traders still expect the Fed to hold off on hiking rates in September, but following Powell's comments, expectations of a rate hike in November rose from a day earlier, according to the CME Group's FedWatch tool. Stock movers included Gap, which jumped seven percent after the clothing retailer beat second quarter profit estimates, and Nordstrom, which dropped eight percent after the department store chain left its forecasts unchanged.