Fed Chairman justifies changed outlook to Congress on Wednesday.
The stock market rallied on Wednesday, fueled in part by dovish comments by Federal Reserve Chairman Jerome Powell. Speaking to the House Committee on Financial Services, Powell essentially stated that uncertainties in economic outlook have increased in recent months.
This increase explains the move by the fed towards a “more accommodative monetary policy” –Fed speak for cutting interest rates—in recent weeks.
Powell cited several mixed statistics to explain the central bank’s changing stance. For instance, while job growth has been strong, there are limits to how far the job market can go with unemployment already near record lows. And wages, while growing, are doing so at a slower rate in the past.
Powell also warned that the Fed is seeing fewer signs of inflation for this stage in the market, a potential warning sign. Yet other signals, such as household confidence, remain high.
Overall, Powell strengthened the case for interest rate cuts later in the year. Traders view rate cuts as bullish in the short-term, as the returns on fixed-income assets lower relative to stocks.
With the stock market pushing record highs, an initial set of rate cuts by the Fed could fuel one last big rally before a recession. If the Fed acts now, however, the view is that the economy may slow, but any recession would be milder as a result.
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