ASX set to rise as Fed chief cheers up Wall Street

Higher interest rates try to snuff out inflation by slowing the economy and dragging on prices for stocks and other investments. The Fed has already pulled its key overnight rate to its highest level since 2007, at a range of 4.50 per cent to 4.75 per cent, up from virtually zero early last year.

At stake is the economy, which many investors see likely heading down one of two paths: either a relatively short and shallow recession or a much deeper and more painful one. Building hopes for the former helped stocks rally through January to a strong start of the year.

Powell indicated he’s on the more optimistic side.

“My base case is that the economy can return to 2 per cent inflation without a really significant downturn or really big increase in unemployment,” he said.

He also said he did not foresee any rate cuts this year.

Others in the market are not as optimistic. A third pathway for the economy is also possible, said Rich Weiss, senior vice president at American Century Investments: one that happened during the 1970s where inflation reignited after the Federal Reserve let up on interest rates too soon.

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“We’re headed into a recession one way or the other, whether the Fed eases up on the brakes or not,” Weiss said. “So you might as well kill inflation while you’re doing it. I think it’s nonsensical to think the Fed is going to magically take their foot off at exactly the right time and slide into a short and shallow downturn and the stock market will come through unscathed.”

One area influencing expectations for the Fed is the job market, which has remained resilient. While strength there helps workers, a worry is that it could lead to too-high gains in wages that give inflation more fuel.

Reports on Wednesday gave a mixed picture on hiring. Private payrolls rose by 106,000 in January, according to ADP. That’s a slowdown from a month earlier and was below economists’ expectations.

But a separate report from the U.S. government indicated more strength. It said the number of job openings increased to 11 million in December, better than expected.

Treasury yields fell as Powell spoke, an indication of expectations for an easier Fed.

The two-year yield, which tends to track expectations for the Fed, fell to 4.11 per cent from 4.21 per cent late Tuesday. The 10-year yield, which helps set rates for mortgages and other important loans, fell to 3.42 per cent from 3.51 per cent late Tuesday.

A lacklustre earnings reporting season also continues on Wall Street, with more mixed profit reports arriving from big US companies.

Electronic Arts tumbled 9.3 per cent after it gave forecasts for upcoming results that fell short of Wall Street’s expectations.

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On the winning side was Advanced Micro Devices, which rose 12.6 per cent even though its profit tumbled 98 per cent in the fourth quarter from a year earlier. Its results were better than analysts expected.

All told, the S&P 500 rose 42.61 to 4,119.21, its highest close since August. The Dow gained 6.92, or less than 0.1 per cent, to 34,092.96, and the Nasdaq jumped 231.77 to 11,816.32.

AP