Equities jumped on Wednesday as traders awaited the release of the latest inflation data, which revealed yet another record pace of price hikes throughout the struggling economy. Nonetheless, this happened a day after Fed Chairman Jerome Powell reaffirmed that the central bank will intervene as necessary to keep increasing prices in check.
According to the Bureau of Labor Statistics‘ December CPI, prices grew at a 7.0% year-on-year pace at the end of 2021, the most significant rise in 40 years. This was in line with the consensus predictions based on Bloomberg numbers and rose from November's relatively high 6.8% growth. Consumer prices increased 0.5% month over month, somewhat more than the 0.4% projected, marking the eighteenth straight month of price rises.
Excluding food and energy costs, the core measure of retail prices increased 5.5% year-over-year in the previous month, the largest pace since 1991.
The market swings on Wednesday followed a comeback surge on Tuesday, with investors finding at least temporary solace in pledges from Jerome Powell that the Fed will intervene as needed to alleviate increasing prices. Powell emphasized during his reappointment hearing that the Federal Reserve will fully employ its policy instruments to reduce inflation.
Powell said before the Senate Banking Committee that if the central bank realizes inflation stays high longer than forecasted and there will eventually be a need to increase interest rates more, the Federal Reserve will do so.
The Fed had earlier said that it intended to raise interest rates three times in 2022 in order to raise benchmark rates from near-zero values. Yet, given the present inflationary environment, several prominent Wall Street companies expect the Federal Reserve to hike rates four times.
However, although Powell reiterated the Federal Reserve's aim of containing inflation and using interest rate rises as an instrument to accomplish so, he unveiled little further about the Bank's strategy to start decreasing its almost $9 trillion balance sheet. The Federal Reserve's December meeting minutes, released the previous week, revealed that policymakers were starting to talk about cutting the Fed's balance sheet after almost two years of asset buying to stabilize the economy amid the COVID-19 crisis. The Federal Reserve Chair reiterated during his testimony that he expects the balance sheet unloading process to start this year.
"I believe the main concern on most investors' heads that we speak to throughout the globe would be a 'policy error' that the Federal Reserve would be extremely hawkish," said Brian Belski, chief investment strategist at BMO Capital Markets. "Mr. Powell essentially emphasized today that it's going to be a process that will take a long time, and I believe that's what's soothing stockholders."
Though the possibility of increasing borrowing prices and stricter financial regulations has heightened turbulence in US markets and tech companies in the previous trading days, the tech Nasdaq Composite outperformed substantially on Tuesday.
"The problem with technology, I would say, is not so much one of a little additional duration of impact because growth is even further away, but rather one of valuation," said Simeon Hyman, ProShares Global Investment Strategist. "And, yes, the biggest-cap technology companies may have been a little overpriced towards the end of 2021 and the start of this year. However, don't throw out solid growth scenarios entirely since they are the best protection against inflation. It refers to the increase in profits and dividends."
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