Friday's Market Minute: Dovish Interpretation Uplifts Equities

Equities continue to climb this week as investors interpret the Federal Reserve is close to wrapping up its rate-hiking campaign. Treasury yields and the S&P 500 volatility index were already easing in the run-up to the Fed decision mid-week, and equity bulls have reclaimed short term momentum that had been lost as the financial climate became more restrictive in recent months. With the broad market up nearly 5 percent since last Friday, it may be getting ahead of itself as investors refocus on corporate earnings and the October jobs report.

Powell kept open the possibility of a fresh hike in December, yet traders are now pricing in an estimated 80% likelihood there will be no more Fed hikes this year. In comparison, there was a 60% probability the day before the FOMC meeting according to the CME FedWatch Tool, a measure of the Federal funds futures market. While the Fed kept open the prospect of additional policy action based on a strong, resilient economy that may be able to absorb additional rate hikes, Powell suggested that Treasury yields at lofty levels are assisting the central bank in keeping monetary conditions restrictive to slowly reduce inflationary excesses. 

Powell refrained from saying that softer labor market conditions are needed to mitigate some inflation pressures going forward, but he indicated the FOMC anticipates tighter monetary conditions will eventually impact growth in the labor market and economy. It is evident the Fed is uncertain as to when the aggregate economy will feel the full impact of their tightening cycle and that they will go meeting by meeting in deciding if the economy warrants further rate hikes.