On Tuesday, Wall Street's major indexes finished in positive territory, reversing recent losses as traders assessed Fed Chairman Jerome Powell's statements.
The Nasdaq rose for the second trading day in a row, closing 1.4% higher at 15,153.45, while the Dow gained 180 points. The S&P 500 recovered from losses earlier to finish in the green.
In the confirmation hearing before Congress on Tuesday, Fed Chair Jerome Powell said that if the rate of price rises does not reduce, the central bank will increase short-term costs of borrowings more aggressively.
"If we anticipate inflation lingering at elevated levels for a longer period than projected amd we need to increase interest rates more, we will," Powell declared during testimony.
According to ProShares global investment analyst Simeon Hyman, investors are betting that inflation would fall to levels low enough that it will not significantly impact equities. However, the Federal Reserve's operations must be divided into two parts.
He said that before discussing rate rises, it is necessary to discuss tapering and the latest events — a quicker unwinding of the balance sheet. This might cause long-term rates to climb irrespective of whether inflation falls and how quickly the Federal Reserve raises rates.
"Therefore, such steps may imply that there aren't as many rate rises needed," Hyman noted.
The Federal Reserve's monetary policy will be in focus this week, with the new CPI report from the Bureau of Labor Statistics (BLS) in the center as investors trying to analyze inflationary pressures and the Fed's probable reaction.
Another increase in the current rate is forecast, with analysts expecting a print of 7.1% in December based on Bloomberg statistics, higher than November's 6.8% annualized rate.
Concerns about interest rate rise happening earlier than planned have dampened investors' excitement ahead of the coming year, leaving the stock market at a lower risk so far in 2022. At the same time, Treasury rates have risen, with the benchmark 10-year yield hovering around 1.8%, the highest point since January 2020.
"We're witnessing a general rethinking of what the Fed will do," explained Steven Wieting, global head investment strategist at Citi Private.
"The possibility of the Fed succeeding in lowering inflation is extremely evident," Wieting added. "It was bound to take place one way or another, and we're just trying to figure out how aggressively the central bank would do it."
Federal Reserve watchers, including Goldman Sachs, Evercore ISI, and Deutsche Bank, are now tracking the Fed's rate rise pace. Companies anticipate a 100 basis point hike in short-term interest rates by the end of this year.
"We are revisiting our Fed forecast one more time given falling unemployment, high wage levels, and the expectation of one more scorching inflation report," Evercore ISI's Krishna Guha stated.
JPMorgan Chief Executive Officer Jamie Dimon told CNBC on Monday that he hopes for a "soft landing" from the Fed as it prepares to start increasing its benchmark fed funds rate in March.
"It will be a bit like threading a needle," Dimon added, warning that inflation might be higher than the Federal Reserve anticipates and rate might be raised more than expected.
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