Fed Chair Powell’s Inflation Prediction Shakes Market Confidence

March 5, 2021
223 Views

Although likely a blip in the extended bull market, stocks closed lower on Thursday. All major indexes reported single-digit declines after Federal Reserve Chair Jerome Powell warned that inflation is on the horizon.

Here’s what was said, and how the markets responded.

Consumer Prices Will Increase This Summer

Jerome Powell said this week that inflation would become a factor in the coming months. The rollout of Coronavirus Vaccines and strong job growth will lead to higher consumer prices and interest rates.

Speaking at the Wall Street Journal Jobs Summit by virtual conference, Powell said that the Fed expects that “as the economy reopens and hopefully picks up, we’ll see inflation move up.”

Powell noted that he was happy with how the economy is progressing, saying that today’s growth is much better than what was predicted during the height of the pandemic.

Investors Unhappy About Inflation

Investors weren’t happy with Powell’s comments, most especially his prediction that inflation would increase. Stock investors see inflation as a major headwind, as it could potentially stifle consumer spending, economic growth, and corporate profits. This could all impact the value of stocks.

There were some moderate selloffs yesterday as investors responded to the news.

  • The Dow Jones Industrial Average (DJIA) closed with a decline of -1.11%
  • The S&P 500 (SPX) closed with a decline of -1.34%
  • The NASDAQ Composite (COMP) suffered a heavier loss and closed with a decline of -2.11%

Powell noted in his comments that any inflation would be short-lived, and the Fed still has its long-term target set at 2%.

Beyond this, the Fed is holding its interest rate, which sits near zero today. This should help to keep any mild price rises in check, even if some institutional rates increase in the meantime.

Powell’s Comments May Have Been Premature

The Federal Reserve’s optimism around the wider economy may be premature, and inflation could be a long way off. The unemployment rate has improved significantly and is currently sitting at 6.3%, but America is still down by 10 million jobs compared to February 2020 before the Coronavirus Pandemic.

Slow and controlled growth and long-term recovery in the job market could limit any potential inflation. As it stands now, yesterday’s selloffs appear to be largely reactionary, rather than being based on any reliable fundamentals. There’s still life in the bull market, which is great news for stock investors.

You may be interested

Job Hiring is Picking Up as Employers and Consumers Gain Confidence
Economy
129 views
Economy
129 views

Job Hiring is Picking Up as Employers and Consumers Gain Confidence

Lamont J - March 29, 2021

The recent government stimulus for small and medium-sized businesses, personal stimulus checks, and declining Coronavirus cases, are all great news…

Fed Could Maintain 0% Interest Rate Until 2024
Economy
120 views
Economy
120 views

Fed Could Maintain 0% Interest Rate Until 2024

Adam R - March 26, 2021

The Federal Reserve is holding its target interest rate in a range of 0.00% - 0.25%, even while the economy…

Supply Constraints Could Slow the Home Market
Economy
160 views
Economy
160 views

Supply Constraints Could Slow the Home Market

Becky H - March 25, 2021

Low inventory has been a constant in the home market for more than a year. The supply of existing and…