Technology stocks, among the worst performing in 2022 because of their sensitivity to higher interest rates, have rallied this year. The Nasdaq Composite, stuffed full of technology stocks, jumped 2 percent on Wednesday. It has climbed nearly 13 percent this year, notching its best start to a year since 2001.
Still, the stock-market rally Wednesday is not going to be the final word on this matter.
Rising stock prices and falling bond yields have created a problem for the Fed, enriching investors and making it easier for them to borrow, undercutting efforts to pull down still high inflation.
“This loosening of financial conditions is undoubtedly not what the Fed was aiming for, and we expect a cacophony of Fed speeches in the coming weeks will aim to reorient the Fed’s message,” said Gregory Daco, chief economist at EY Parthenon, Ernst & Young’s strategy consulting arm. “In other words, the infernal tango will continue as the Fed and markets try to find synchronized rhythms once again.”
The last time stocks began to rise markedly, over the summer last year, Mr. Powell had to publicly warn that the fight against inflation was far from over. His caution then was enough to send stock prices sharply lower again.
This time, Mr. Powell struck a more balanced tone, acknowledging the resilience of the economy and that he still expects it to grow this year. He said that investors appear to think inflation will fall more quickly than the Fed expects, allowing the central bank to reduce interest rates sooner.
“We have a different view, a different forecast really,” said Mr. Powell, noting that the central bank is willing to adjust its policy if it is wrong.
The jump in stock prices this year has left some investors worried that markets are being too optimistic, with the Fed’s impact on the economy, consumers and companies still to be fully realized. And if Mr. Powell is unsatisfied with the markets’ response, he will get another chance to set things straight when he speaks at the Economic Club of New York next week.
“We are shifting toward asking, how much damage has the Fed done?” said Chris Murphy, a derivatives strategist at Susquehanna International Group. “I think investors are underappreciating that.”
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