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S&P 500, Nasdaq Hit Record Highs After Powell Reiterates Fed’s Commitment To $120 Billion Monthly Stimulus Despite ‘Sharp’ Inflation

Topline

Major stock market indexes hit a record high Friday after Federal Reserve Chair Jerome Powell reiterated the central bank’s commitment to its unprecedented economic stimulus measures, and though he gave his strongest indication yet that the Fed could begin reducing stimulus by the end of this year, he stopped short of giving a specific timeline for the tapering.

Key Facts

Speaking at the Fed’s annual economic symposium in Jackson Hole, Wyo., Powell said the Fed’s strong economic support—including $120 billion in monthly asset purchases and historically low interest rates—has fueled a “vigorous” recovery, but that uncertainty surrounding the pandemic, and particularly the delta variant, remained too high to ease on stimulus.

The Fed chair reiterated the central bank’s intention to continue its monthly asset purchases until “substantial” progress is made toward maximum employment and price stability, and said that despite inflation exceeding the Fed’s target, the labor market recovery remains “turbulent.”

In his most pointed comments about inflation to date, Powell acknowledged the economy’s rapid reopening has created a “sharp run-up” in consumer prices but said lagging wage growth suggests inflation won’t be excessive. 

Stocks immediately surged during Powell’s comments, with the S&P 500 climbing 0.8% to a record high of 4,505 points shortly before 10:30 a.m., right as the tech-heavy Nasdaq jumped 0.8% to a high of 15,089 points.

Despite Powell’s insistence that monetary policy should stay intact for now, other Fed officials have been warning the measures are likely to create runaway inflation, with St. Louis Fed President Jim Bullard saying on Friday the central bank should begin tapering immediately to moderate recent price growth, which hit a nearly 13-year high this summer.

Meanwhile, on Thursday, Dallas Fed President Robert Kaplan said he’s concerned the central bank’s stimulus has contributed to inflation and excessive risk-taking that has led to “distortions in financial markets” before saying the Fed should begin to reduce asset purchases in October “or shortly thereafter.”

Key Background

The stock market started to recover from its pandemic-induced crash last year on the day Powell pledged to use the central bank’s “full range of tools to support the U.S. economy” until “substantial further progress” is made toward a full economic recovery. Though experts have increasingly warned the hefty stimulus measures could lead to runaway inflation, stocks haven’t responded well to the prospects of decreased stimulus. Last week, stocks posted their worst week in two months after the Fed signaled it may ease support this year.

Chief Critic

“I am concerned with the impact that ultra-loose Fed policy is having on the economy,” Kaplan said Thursday, adding that rising gas and housing prices are “disproportionately” affecting lower-income communities. “At the Fed, we have to take that very seriously—as well as the knock-on effects that high housing prices are having on rents… I think we’ll be a lot healthier if we could soon wean off the purchases.”

What To Watch For

When—and by how much—the Fed eases its monthly asset purchases. In a Monday morning note to clients, Goldman Sachs analysts said they believe the Fed will formally announce a reduction of about $15 billion by November. Market analyst Tom Essaye, Founder and President of the Sevens Report, says such an amount could spark a “knee-jerk” drop in stocks, but isn’t too worried about its long-term implications. If the Fed begins tapering at a rate of $30 billion each month, however, Essaye says stocks would drop sharply, led by those in sectors hardest-hit by the pandemic, including energy, materials and consumer discretionary.

Further Reading

S&P 500 Hits Second-Straight Record High As Experts Warn Of ‘Excessively Bullish’ Stocks—How Much Higher Could They Go This Year? (Forbes)

S&P 500, Nasdaq Hit New Record Highs As Vaccine Rally Continues—But Here’s What Investors Are Focused On Next (Forbes)

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