Dec 16, 2021 - Economy

Stocks rally after the Fed's hawkish pivot

Picture of Federal Reserve chair Jerome Powell

Federal Reserve chair Jerome Powell. Photo: Kevin Dietsch/Getty Images

The Federal Reserve is set to remove the punch bowl. And the market is totally fine with that.

Driving the news: The Fed said Wednesday that it'll hasten its pullback of emergency market support, opening the possibility of interest rate hikes as soon as March.

  • Markets overwhelming welcomed the hawkish pivot. The S&P 500 and Nasdaq ended the day with gains of 1.6% and 2%, respectively, after both spent the day in the red up until Fed chair Jerome Powell's press conference.

Why it matters: Policy tightening often causes risk assets like stocks to sell off — and that’ll no doubt happen, at some point. But for now, the prevailing reaction appears to be one of relief that the Fed is on it when it comes to addressing inflation, Ellen Gaske, lead economist at PGIM Fixed Income, tells Axios.

The big picture: Powell has acknowledged numerous times in the last few months that inflation has run hotter than expected this fall.

  • The Fed's latest 2022 inflation forecast of 2.7% core PCE growth is up slightly from its prior estimate — but that still envisions a sharp turnaround from the current level of 4.1%.

"It would appear that the market is very willing to believe [the Fed] at this stage," Daniela Mardarovici, co-head of U.S. multisector fixed income at Macquarie Asset Management, tells Axios.

The intrigue: Also contributing to Wednesday's stock rally were bearish options trades that investors put on leading up to the meeting — and quickly unwound after stocks started to strengthen in the afternoon, Bloomberg reports.

The bottom line: The Fed won at the communication game. Markets expected a pivot, and they got a pivot. Now comes execution.

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