Stocks Tick Higher Following Powell Comments

US stocks rose on Tuesday, even as investors weighed remarks from Federal Reserve officials that indicated a higher longer-term outlook for interest rates.

The S&P 500 rose 0.4% in afternoon trading, while the Dow Jones Industrial Average rose 0.3%. The tech-heavy Nasdaq Composite rose 0.7%.

Investors have been cheered in recent weeks by signs that inflation is easing and hints that central bank officials are considering when to stop raising interest rates. However, Fed policymakers have sounded a cautious note that even when rate hikes end, monetary policy will need to remain tight.

Fed Chairman Jerome Powell said on Tuesday that the central bank is strongly committed to reducing inflation, although raising interest rates to curb economic growth could trigger a political blowback.

“The critical question on everyone’s mind right now is: When will we see the Fed’s tightening peak? said Stephen Innes, managing partner at SPI Asset Management. “We keep seeing the Fed come out and make these really arrogant comments, but the market isn’t really pricing it in.”

Mary Daly, president of the San Francisco Fed, and Raphael Bostic, president of the Atlanta Fed, both noted in comments Monday that interest rates will need to rise above 5% and stay there for some time. The Fed’s base rate is currently in a range between 4.25% and 4.5%.

JPMorgan Chief Executive Jamie Dimon said on Tuesday that the Federal Reserve may need to raise interest rates to 6% to fight inflation.

Traders on the floor of the New York Stock Exchange on Monday. US stock indexes have made a muted start to 2023. Photo: Michael M. Santiago/Getty Images

Even with a tentative end to rate hikes on the horizon, investment managers are feeling cautious about the coming months, as the impact of tighter monetary policy on corporate earnings and economic growth takes time to be felt.

As these effects increase, the economy could enter recession by the middle of the year, said Hani Redha, a global multi-asset portfolio manager at PineBridge Investments. “The lagged effects of austerity haven’t hit us in any meaningful way yet,” he said.

Investors are looking to monthly inflation figures due on Thursday and upcoming fourth-quarter earnings as potentially important market drivers. Earnings season will pick up speed later this week, with a slew of corporate reports from major banks including Bank of America, JPMorgan Chase and Citigroup on Friday.

“This is a really complicated environment to unpack right now,” said John Porter, chief investment officer and head of equity at Newton Investment Management. “I am cautious about the outlook over the next six months.”

While a possible recession has been widely telegraphed, some investors do not expect bank earnings to be affected until later this year.

“Given there was still a significant amount of volatility in the markets last year, this could prove to be a significant headwind for banks,” said Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management. “What we will really be looking for is which management teams have managed to mitigate pandemic distortions as they prepare for this potential slowdown.”

US government bond yields rose on Tuesday. The yield on the benchmark 10-year Treasury note climbed to 3.618% from 3.516% on Monday. Bond yields and prices move in opposite directions.

Shares of cryptocurrency exchange Coinbase COIN 12.96% Global rose 9% after the company said it would eliminate about 20% of its staff and adopt broad cost cuts. The stock fell more than 80% in 2022.

Shares of retailer Bed Bath & Beyond rose more than 20% after the company said it plans to accelerate cost-cutting as it tries to remain solvent.

Brent crude, the international oil benchmark, rose 0.6% to $80.10 a barrel.

Overseas indexes were mixed. In Europe, the Stoxx Europe 600 fell 0.6%, led by losses for retailers. In Asia, Hong Kong’s Hang Seng fell 0.3%, while China’s Shanghai Composite lost 0.2% and Japan’s Nikkei 225 rose 0.8%.

Write Will Horner at [email protected]

Corrections & Enhancements
The Shanghai Composite Index closed up 0.2%. An earlier version of this article incorrectly said the index rose 0.4%. (Corrected on January 10)

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