US stocks closed up for the first time in three days after Federal Reserve Chairman Jerome Powell said he would support a nominal 25 basis-point, or quarter percentage point, increase in the first US rate hike in two years due tentatively in March.
Wall Street’s three major stock indexes - the Dow Jones Industrial Average index, the S&P 500 and the Nasdaq Composite - closed Wednesday’s trading up between 1.6% and 1.9%. The indexes had fallen about 3% on the average in the first two sessions of the week on fears about the Russian-Ukraine war and how that might impact the US and global economies.
Investors who fled to the safety of havens such as gold and the dollar between Monday and Tuesday regained their appetite for stocks and other risk assets following Powell’s assurance that the US central bank will be nimble with rate hikes, and not aggressive as many had feared.
"I'm inclined to propose and support a 25 basis point rate hike," Powell said during his semi-annual testimony to the US Congress on the state of the economy. "The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain. Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook."
The Fed’s policy-making Federal Open Market Committee, or FOMC, will meet March 15-16 and another six times through December 13-14.
There is a chance that the FOMC could raise rates by 25 basis points or a quarter percentage point at each meeting. But economists say that’s unlikely as the Fed would want some pause to see how its monetary tightening was working and the impact that was having on the labor market and economy.
Prior to Powell’s remarks on Wednesday, some Fed bankers, such as Charles Evans and James Bullard - who lead the Chicago and St Louis chapters of the central bank — were suggesting rapid rate increases at each forthcoming Fed meeting. Bullard had even called for a 50-basis point, or half percentage point, increase, if necessary, until there was evidence of a significant drop in inflation.
After contracting 3.5% in 2020 from disruptions forced by the COVID-19, the US economy expanded by 5.7% in 2021, growing at its fastest pace since 1982. But inflation grew even more. The Personal Consumption Expenditure Index, a US inflation indicator closely followed by the Fed, rose by 5.8% in the year to December and 6.1% in the 12 months to January, Both readings also indicated the fastest growth since 1982.
In Wednesday’s trade, the Dow Jones Industrial Average, made up mostly of industrial stocks, closed up 1.8%. The Dow has lost almost 6.7% since the year began. The S&P 500, which groups the top 500 US stocks, settled up 1.9%. For the year, it was down 8%. The Nasdaq Composite, made of highly-valued tech stocks such as Facebook, Amazon, Apple, Nasdaq and Google, finished up 1.6%. It has lost 12.1 % so far for 2022.
