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Stock market sees swings on Fed commentary

Yahoo Finance's Jared Blikre discusses how Fed Chair Powell's comments are moving markets on Thursday.

Video Transcript

AKIKO FUJITA: As we said, markets still digesting commentary from Fed Chair Jay Powell this morning, speaking at the Cato Institute. He's reiterated that the Fed will do what it takes to fight inflation. Take a listen.

JAY POWELL: History cautions strongly against prematurely loosening policy. I can assure you that my colleagues and I are strongly committed to this project. And we will keep at it until the job is done.

AKIKO FUJITA: Let's bring in Yahoo Finance's Jared Blikre with me here at the desk. Jared, this wasn't a new message.

JARED BLIKRE: No.

AKIKO FUJITA: This is what we heard coming out of Jackson Hole. But it certainly feels like investors have kind of come accustomed to saying, we know they're going to keep the gas on the pedal.

JARED BLIKRE: I think that's what the Fed is aiming for because they are doubling, tripling, quadrupling down, saying, we really, really, really mean it. We're going to hike until we see these inflation numbers come down. Now I prepared something on the YFi Interactive. This is a little timeline broadcast or, actually, overlaid on the S&P 500. This is a three-month chart. So this shows the June lows. And here, we have those mid-August highs here.

And now, in late July-- that's July 27-- we had the last FOMC meeting. And at the presser, Jerome Powell said, while another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then. So he's data dependent. That was a key pivot that we saw at that time. And despite that, we saw stocks rallying.

Now, we saw a big down day. And that was at the Jackson Hole speech. We covered that in depth. He said, at that meeting, we will keep at it until we are confident the job is done. While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the committee will need to see before we are confident that inflation is moving down. That finally scared the markets a little bit.

And then we got some additional color by Minneapolis Fed President Neel Kashkari. A couple of days later, he said, I was actually happy to see how Chair Powell's Jackson Hole speech was received. That means he was happy to see stocks go down on that. I certainly was not excited to see the stock market rallying after our last FOMC meeting. So in other words, stocks going up. All right, that's bad for the Fed. Stocks going down, that is good.

And why is that? That's because financial conditions, that's something the Fed is trying to keep a rein on, a lid on. When those are too easy, when stocks are going up too much, when bond spreads are narrow, it's easy to borrow money. That is not what the Fed is trying to do with inflation. So big underlying underscore here for the markets are, the Fed really, really means it.

AKIKO FUJITA: The Fed means it. And when you think back to where the markets were moving pre-Jackson Hole, it's sort of run ahead, right, in the expectation that there could be rate cuts come next year.

JARED BLIKRE: Right.

AKIKO FUJITA: And that's when Jay Powell and company essentially came out and said, look, you're not getting the message here.

JARED BLIKRE: The market was frontrunning the Fed pivot, the expectation that the Fed was going to go back on or just make a break from its inflation fighting rhetoric, if not actual monetary policy decisions. And that's just-- they're not ready for that to happen. We need to see a couple. We need to probably see three or four monthly reports showing not only moderation, but declines here for an actual pivot.

That could-- that probably is not going to happen. We're talking rate cuts until late next year. But before these last meetings, only a month ago, the rate cuts were expected to come at the beginning of next year. That's 2023. Fed saying, we just don't see that happening.

So I think the bottom line-- have I said this before? The Fed really, really means it. The market got ahead of itself, and now it's coming back in line. Now it doesn't mean that we have to see new lows in the indices. We are, it looks like, in a little bit of scary territory. We could go down a little bit. But it's really going to depend on some other things here. And fortunately, we do have a CPI number that's going to come out, I believe, next week, and then the big Fed meeting a couple of weeks after that.

AKIKO FUJITA: OK, Jared, thanks so much for that.