Wall Street closes higher after Fed Chair Powell delivers a 'Goldilocks' speech

Stocks blasted higher in afternoon trading Friday, even after Federal Reserve Chair Powell warned in comments in Jackson Hole, Wyoming, that central bank officials were "prepared to raise rates further."

Traders appeared to shake off fears of future rate hikes, and instead focused on the positive parts of Powell's speech where he applauded strong economic growth.

"The market may have been comforted by Powell acknowledging that recent inflationary data has been encouraging and thus, interest rates are unlikely to move much higher from here," said Brian Price, head of investment management for Commonwealth Financial Network.

In corporate news, shares of Affirm closed nearly 30% higher. The buy now, pay later firm beat earnings expectations on Friday morning and issued positive guidance for the rest of the year.

Shares of Hasbro grew by 5.7% after investment bank Stifel shifted its price target for the stock from $79 to $94.

The Dow jumped 241 points, or 0.7%, on Friday.

The S&P 500 gained 0.6%.

The Nasdaq Composite was 1% higher.

For the week, the Dow fell 0.4%, the S&P 500 gained 0.8% and the Nasdaq was up 2.3%.

European Central Bank President Christine Lagarde delivered a message that was nearly identical to that of Federal Reserve Chair Jerome Powell.

In a luncheon address from Jackson Hole, Wyoming, Lagarde said the central bank is standing firm on its goal to achieve 2% inflation. In doing so, she said the ECB will continue to set interest rates "at sufficiently restrictive levels for as long as necessary."

Unlike Powell, she stressed in her remarks the importance of "maintaining public confidence" by helping households understand the ECB's actions and miscalculations. That's why the central bank has been "publishing the main factors behind our inflation forecast errors and we intend to continue doing so," Lagarde said Friday.

Eurozone inflation is at 5.3% as of July, according to Eurostat data. Given their proximity to the war in Russia and Ukraine, Eurozone countries are much more vulnerable to supply shocks that are propping up inflation, compared to the United States.

The Fed wants "below-trend growth"

Federal Reserve Chair Jerome Powell said Friday there is still a risk that inflation won't come down to the Fed's 2% target as the central bank faces the proverbial last mile in its battle with higher prices.

"Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy," Powell said.

Generally, if demand is red hot, employers will want to hire to meet that demand. But many firms continue to have difficulty hiring, according to business surveys from groups such as the National Federation of Independent Business. In theory, that could prompt wage increases in order to secure talent — and those higher costs could then be passed on to consumers.

While some Fed officials back a more aggressive stance on fighting inflation, others think there will eventually be enough restraint on the economy and that more hikes could cause unnecessary economic damage. The lagged effects of rate hikes on the broader economy are a key uncertainty for officials, since it's not clear when exactly those effects will fully take hold. Research suggests it takes at least a year.

Acknowledging progress on inflation

Powell pointed to the steady progress on inflation in the past year: The Fed's preferred inflation gauge — the Personal Consumption Expenditures price index — rose 3% in June from a year earlier, down from the 3.8% rise in May. The Commerce Department officially releases July PCE figures next week, though Powell already previewed that report in his speech. He said the Fed's favorite inflation measure rose 3.3% in the 12 months ended in July.

The Consumer Price Index, another closely watched inflation measure, rose 3.2% in July, a faster pace than the 3% in June, though underlying price pressures continued to decelerate that month.

In his speech Friday, Powell stood firmly by the Fed's current 2% inflation target, which was formalized in 2012 — at least for now. The Fed is set to review its policy framework around 2025, which could be an opportunity to establish a new inflation target. 

An economy more resistant to monetary policy?

Powell also weighed in on an ongoing debate among economists about whether the "neutral rate of interest," also known as r*, is higher since the economy is still on strong footing despite the Fed's aggressive pace of rate hikes. 

In theory, the neutral rate is when real interest rates neither restrict nor stimulate growth. The Fed chair said higher interest rates are likely pulling on the economy's reins, implying that r* might not be structurally higher, though he said it's an unobservable concept.

"We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation. But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint," Powell said.

Either way, while the Fed chief hinted that more rate hikes might be coming down the pike, there's no guarantee either way.

Stocks recovered some of their losses Tuesday afternoon after initially falling as investors reviewed Federal Reserve Chair Jerome Powell's speech at the Jackson Hole economic summit.

The Dow rose 125 points, or 0.4%, the S&P 500 gained 0.2% and the Nasdaq Composite added 0.1%.

During his highly anticipated speech, Powell said the central bank is maintaining its 2% inflation target and that more rate hikes could be needed to stabilize prices. While stocks held relatively steady during his speech, they turned lower as investors parsed his comments.

"The initial market reaction after the speech was to go lower, but keep in mind that Nvidia’s blowout earnings weren’t enough to ignite a market rally, so it’s not surprising that Powell’s ambivalent stance isn’t getting the bulls running again either," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

The Dow is on track to end the week down, while the S&P 500 and Nasdaq Composite are on pace to gain.

Here's what Wall Street has to say about Federal Reserve Chair Jerome Powell's speech Friday morning:

• "Powell left open the issue of additional tightening to arrest inflation. The bond market is not very convinced of another move, particularly at the September meeting," said Gary Pzegeo, head of fixed income at CIBC Private Wealth US.
• "This speech is consistent with PNC’s baseline forecast for no further increases in the fed funds rate this year. ... PNC expects a mild recession starting in early 2024 as the cumulative impact of tighter monetary policy leads to contraction in interest-rate sensitive sectors," said Gus Faucher, chief economist at PNC Financial.
• "Last year, [Powell] took out the bazooka and was way more hawkish than anyone expected, which saw heavy selling into October. This time he hit it more down the middle, with no major changes in future hikes a welcome sign," said Ryan Detrick, chief market strategist at Carson Group.
• "This monetary policy uncertainty means that equity price declines and volatility may have further to run," said Sam Stovall, chief investment strategist at CFRA Research.
• "An aggressive Fed may not be enough to derail this bull market unless we see a recession. But in the meantime, it may be worth searching for undervalued names and investments instead of going all out on growth," said Callie Cox, investment analyst at eToro.

Since July 2022, Federal Reserve officials have been unanimous on interest rate decisions at each meeting. But that might not be the case much longer.

While Philadelphia Fed President Patrick Harker expressed skepticism Friday over the need to continue hiking, Cleveland Fed President Loretta Mester echoed Fed Chair Powell's message of leaving the door open for more rate hikes.

"We don't want to be satisfied because inflation remains too high," Mester said in an interview with CNBC from Jackson Hole, Wyoming. "We need to see more evidence to be assured that it's coming down in a sustainable way and in a timely way."

Like Powell, she stressed that the central bank needs to be "very careful" not to hike rates higher than the level required to get inflation to the Fed's target of 2%. Mester is currently an alternate Fed official at policy meetings but will vote on interest rate decisions in 2024.

Harker reiterated that he's committed to achieving the Fed's goal but is much more keen on taking a wait-and-see approach for the time being.

"Just keep the pressure going, let this work through," Harker said in a Jackson Hole interview with Bloomberg on Friday. In other words, he doesn't think it's necessary to introduce more stressors in the economy through rate hikes when the effects of prior hikes haven't fully materialized. Harker will be voting on interest rate decisions for the Fed's three remaining meetings of the year and won't be able to vote next year.

At the center of the debate is Chicago Fed President Austan Goolsbee, who appears to be undecided about what the Fed should do going forward, let alone at its meeting next month.

However, if current economic trends continue to play out, "our argument is going to revolve around how long should we keep rates at the levels they are, rather than how much higher should the rates go," Goolsbee said Friday in a CNBC interview from Jackson Hole.

Like Harker, Goolsbee will be voting on interest rate decisions for the rest of the year.

US stocks gave up earlier gains and tumbled in late morning trading as traders chewed on Federal Reserve Chair Jerome Powell's Jackson Hole speech.

The Dow was up 40 points, or 0.1%. The S&P 500 fell 0.1% and the Nasdaq dropped 0.3%.

During his speech, Powell struck a hawkish tone, leaving the door open for future interest rate hikes.

"We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective," Powell said Friday morning.

The July Personal Consumption Expenditures Price Index, the Federal Reserve's preferred inflation gauge, is set to be released publicly on Thursday, August 31. But Fed Chair Jerome Powell gave a sneak peek Friday into a key figure from the upcoming report.

"Inflation peaked at 7% in June 2022 and declined to 3.3% as of July," Powell said Friday in his Jackson Hole speech, referring to annual inflation rates. The latest PCE report showed prices rose 3% for the 12 months ending in June.

If the report does indeed show 3.3% inflation in July, that would mean inflation heated up slightly from the previous month. That was the case with July's Consumer Price Index report — although the month-to-month increase in the annual rate of inflation primarily stemmed from baseline effects comparing last year's inflation rate to this year's.

Americans' attitudes toward the US economy appear to be growing more tepid. 

The University of Michigan's closely watched consumer sentiment index measured 69.5 in August, down slightly from July. The reading is in line with estimates released earlier this month.

"Consumers perceive that the rapid improvements in the economy from the past three months have moderated, particularly with inflation, and they are tentative about the outlook ahead," said Joanne Hsu, director of the university's Surveys of Consumers, in a statement Friday. 

Sentiment levels essentially moved "sideways" in August, Hsu said. Consumers' slight trepidation bucks a recent trend of sharp upswings in optimism. But the August reading still remains well above the lows hit last summer when inflation raged to decades-high levels.

"This month's reading reflects divergent views of consumers, with some emphasizing the stark improvement over last summer's excessively high inflation and others focusing on the lack of notable changes in economic conditions this month," Hsu said. "With strong income expectations, consumers may be hopeful that the economy will be on an upswing again, but for the moment they are reserving judgment."

Inflation expectations for the year ahead ticked down to 3.3% from 3.4% in July, showing "remarkable stability" but still trending higher than pre-pandemic expectations, which ranged in the 2.3% to 3% range.

Inflation expectations are crucial data points for the Federal Reserve. If consumers believe prices will remain high, that could factor in to increased wage demands, which could cause businesses to raise prices and put upward pressure on inflation.