Stock Market Rally Under Pressure on Fed Comments

The S&P 500 is under pressure after the Federal Reserve rate cut hopes were unwound.

SP 500 – Daily Chart

SP 500 – Daily Chart 

The S&P 500 is trading below 5,000 for the first time in over a month. The support level is 4,820, which was the highest in late 2022. 

Federal Reserve Chair Jerome Powell said a “lack of further progress” on inflation meant that the central bank likely won’t cut interest rates at its next meeting in two weeks, hinting at keeping them higher for longer. 

“The recent data have clearly not given us greater confidence,” Powell said last week, saying that inflation will fall below the central bank’s 2% goal. He added, “it is likely to take longer than expected to achieve that confidence.” 

“Right now, given the strength of the labour market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” the Fed chief said. 

Interest rates remain at a 23-year high after the Fed started an aggressive rate-hike campaign two years ago. However, that campaign was started by the Ukraine-Russia conflict, and investors are likely concerned about Iran’s involvement in the Middle East and a steady increase in oil prices

“Our responsible management is ensuring that fiscal policy is taking the pressure off inflation when it is at its highest,” Powell said.

The US economy and the job market remain strong. At the same time, higher mortgage rates have stalled the housing market, with existing home sales slowing down for new build investments. The latest retail sales report showed that consumers continued to spend last month, but there is pressure with higher inflation. 

Wall Street was not expecting a rate cut in May, but many still expect the first one to come in the summer. Analysts at Goldman Sachs, JPMorgan and Nomura estimate that July will be the first move. However, analysts at Wells Fargo, Bank of America, Barclays, and Deutsche Bank expect the first rate cut to come after the summer, as late as December. 

“My baseline outlook continues to be that inflation will decline further, with the policy rate held steady at its current level, and that the labour market will remain strong, with labour demand and supply continuing to rebalance,” Fed Vice Chair Philip Jefferson said last week.

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