Powell Testimony Sends Stocks Higher: What Investors Need To Know

The SPDR S&P 500 ETF Trust SPY traded sharply higher on Wednesday after Federal Reserve chair Jerome Powell testified in front of Congress.

Powell told the House of Representatives Financial Services Committee that Russia's invasion of Ukraine has created economic uncertainty, but he still believes interest rate hikes are appropriate despite recent market volatility.

Related Link: Gas Prices: Why Russia's Invasion Of Ukraine Will Increase Your Costs At The Pump

“The implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely,” Powell said. "With inflation well above 2 percent and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month."

Bitcoin BTC/USD traded lower by 0.2% on Wednesday after Powell said it's possible to have more than one reserve currency, but added that the war in Ukraine "underscores the need" for Congressional cryptocurrency regulations.

Rate Hike Outlook: Powell added that he believes 0.25% rate hikes are appropriate for now, but said he would be open to larger hikes if inflation worsens. Powell also provided some insight into the Fed's plan to reduce its balance sheet, telling Congress that the Fed will do so in a "predictable manner, mostly by allowing some bonds to roll off each month without reinvesting the proceeds."

The bond market is currently pricing in five quarter-percent rate hikes in 2022 that would boost the fed funds rate to between 1.25% and 1.5% by the end of the year.

No Surprises: Bill Adams, Chief Economist for Comerica Bank, said Wednesday that Powell didn't say anything particularly surprising, but he did provide some welcome clarifications for investors.

"The Fed will try to cool demand enough to get inflation under control, but not choke off the recovery, " Adams said. "The Fed is expecting labor force participation to increase as 'childcare responsibilities, fear of covid, and other factors' become less of an issue; they want to keep the economy growing so that those workforce reentrants find jobs when they come looking for them."

Benzinga's Take: Multiple interest rate hikes, balance sheet reductions and global geopolitical instability are a lot for the market to digest in a single year. However, the positive trading action on Wednesday suggests investors seem to believe the U.S. economy is strong enough to overcome these headwinds and continue to grow.

Photo: Courtesy of Brookings Institution on Flickr