Investor Confidence Rises As Fed Talks Disinflation: ‘Investors Are Powell-Comment-Dependent’

Stock prices, led by tech stocks, rallied on Tuesday after Federal Reserve Chair Jerome Powell said he expects significant disinflation in 2023, a sign that the central bank believes it’s making progress in its fight against the runaway cost of everything.

The surprising strength of the labor market underscores why it could take a while to bring inflation down, Powell said Tuesday in a conversation at the Economic Club of Washington, D.C. The January jobs report showed a gain of 517,000 jobs — a cause of concern for the Fed.

“The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector,” Powell said. “But it has a long way to go. These are the very early stages of disinflation.”

After six straight months of declines in the two primary inflation trackers — the consumer price index and personal consumption expenditures price index — Fed officials say that their rate hikes are working.

It could take more than a year for inflation to come down to the desired 2 percent level, the Fed chairman said.

“We expect 2023 to be a year of significant declines in inflation. It’s actually our job to make sure that that’s the case,” he said. “My guess is it will take certainly into not just this year, but next year to get down close to 2 percent.”

The major U.S. indexes advanced as Powell spoke. Stock prices have been rising since the beginning of the year as investors bet the Fed would start easing off on rate increases later in 2022, the Wall Street Journal reported.

The S&P 500 rose 6.2 percent in January, while the Nasdaq climbed 10.7 percent. The past few days have been more volatile, and last week’s strong jobs report raised the prospect of continued rate increases.

So far this season, more than half of S&P 500 companies have reported earnings, with about 69 percent exceding expectations, according to FactSet data.

Federal Reserve Chairman Jerome Powell also mentioned disinflation on Feb. 1, but warned that surprisingly strong economic data like the January jobs report could push the central bank into raising interest rates more than markets expect. The Federal Open Market Committee raised the fed-funds rate by 0.25 percent to a target range of 4.5-to- 4.75 percent, stressing that it has more work to do to bring inflation under control.

That speech triggered record options bets, topping even the meme stock frenzy.

“Just as the Fed is data dependent, investors are Powell-comment-dependent,” said Sam Stovall, chief investment strategist at CFRA Research. “With his speech to the Economic Club of Washington today, I think people are going to pay attention.”

While optimism is rising and investors are turning bullish on the economy, the overall IBD/TIPP U.S. Economic Optimism Index is still in bear territory at 45.1, below the 50 neutral level for an 18th straight month. Still, the index rose 1.8 points in February to a 10-month high, Investors.com reported.

Now 53 percent of adults polled think the U.S. economy is in a recession, down from 61 percent in October and 55 percent in January. Among investors — survey respondents who say they have at least $10,000 in household-owned mutual funds or equities — the U.S. Economic Optimism gauge jumped 7.5 points to 57.1 However, pessimism got worse among noninvestors — down 1.8 points to 36.4.

There have been a series of bear-market rallies since the beginning of the year, “but there’s some cause for hope that this rally could be for real,” Jed Graham wrote.

Goldman Sachs, which previously called for a 35 percent odds of an economic recession within 12 months, cut their probability to 25 percent.

The New York Federal Reserve currently estimates the probability of a U.S. recession at 47 percent within 12 months of December 2022, Forbes reported. “That’s high. Ironically it’s a greater probability than before the past 4 U.S. recessions,” wrote Simon Moore, who works as an outsourced chief investment officer for institutional investors. 

An inverted yield curve offers one of the best track records for forecasting U.S. recessions since World War II. The U.S. yield curve is deeply inverted and has been for some time — a sign a recession’s on the way.