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Explaining the Market’s Reaction to Jerome Powell’s Speech


Yesterday, Jay Powell and the FOMC gave us their decision on interest rates. In the accompanying statement and the subsequent press conference given by Fed Chair Jay Powell, they explained to some extent how they arrived at that decision and, more importantly, they also explained how they see the rest of the year panning out. As I’m sure you are aware, that news was greeted with glee by equity traders, with all three major stock indices jumping to record-high levels in yesterday’s session. But is that response appropriate, and can it continue?

First, these are two separate questions because, as always, the market response to news is not just about the news itself. The stock market response can be appropriate to the news but not sustainable if the overall mood of traders and investors is bearish based on other factors. Or it could be that even an obvious overreaction will continue for months, or even years. Remember, the phrase “irrational exuberance” was coined to describe the dotcom boom two full years before stocks hit their highs.

So first, was this an appropriate response in stocks?

Well, there was certainly a shift in how Powell and the committee talked about their plans and how they intend to look at data going forward. That could be seen as bullish, but their stated intentions didn’t really change at all. The market has been assuming three rate cuts this year for some time, and both the Fed’s words and the so-called…

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