Markets Cheer The End of A Troubled Era

Fed Chairman Jerome Powell. Photo: REUTERS/Kevin Lamarque

Thursday marked a period of raucous celebration on Wall Street, as comments from the Federal Reserve on Wednesday increased hopes of an end to a two-year long period of rapid rate hikes.

For the second time in a row, the Fed chose not to conduct a hike in target rates, as most market observers expected. While Chair of the Federal Reserve Jerome Powell refused to explicitly rule out another rate hike in the future, he noted that the increase in market-based interest rates — specifically U.S. Treasury rates — throughout the past two months have the potential to significantly disrupt the steady pace of wage and price growth. Powell also cited the sharp increase in other financing costs, which have risen in tandem with the federal funds and treasury rates. “These higher Treasury yields are showing through to higher borrowing costs for households and businesses,” Powell said at a press conference. “Those higher costs are going to weigh on economic activity to the extent this tightening persists.”

The decision by the Fed to pause interest rates comes despite the fact that GDP growth was at its highest in more than a year and a half, coming in at 4.9%, way above expectations. Consumer spending propelled economic growth in the third quarter, defying earlier projections of savings depletion by this quarter. However, the new GDP report squares well with more recent reports showing Americans have saved more during the pandemic than expected. Throughout the earlier parts of the year, investors viewed overly high economic growth as an inflationary pressure that would lead the Fed to hike rates, and Powell’s recognition of the effect of rising bond yields on the economy has helped assuage concerns about the recent GDP report’s upward pressure on interest rates.

The ringing of the opening bell at NYSE. Photo: PR Newswire

After a week of turmoil in the tech industry, the market roared back to life from Wednesday to Friday. The Dow rose 565 points on Thursday and 222 points on Friday. The Nasdaq rose 184 points on Friday. Market indices overall were up by more than 5% for the week, marking the market’s best week of the year.

Further contributing to the rally was the job report on Friday. Hourly wages, and job openings missed expectations, with unemployment rising to 3.9% after being forecasted to remain at 3.8% for the month. This suggests that the Fed’s rate hikes and the increase in bond yields have been working to slow down the economy to prevent excessive inflation. In addition, labor costs for the third quarter fell by 0.8%, compared to expectations showing it increasing by 0.7%, further signaling a cooling labor market.

However, not all was calm, particularly within the tech industry. Due to worsening earnings guidance, Apple lagged behind the Nasdaq, even falling on Friday. This has been credited to dismal projections by Apple for iPad sales and a decrease in the company’s sales for the fourth quarter in a row, even though Apple exceeded expectations for sales and earnings per share.

The decreased expectation for rate hikes and a cooling economy has led to a sharp drop in bond yields. Throughout the week, the yield on 10-year Treasury bonds has dropped from nearly 5% to just above 4.5%, contributing to this week’s rally in equities. Declining bond yields contribute to the economy by lowering borrowing costs. And, in a slight sign of hope for homebuyers, mortgage rates fell slightly for the first time in seven weeks.