US Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington, DC, on May 4, 2022.

Jim Watson | AFP | GettyImages

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US stocks rallied on Fed Chair Jerome Powell’s speech, despite Powell sounding hawkish tones. The game of chicken between the Fed and markets continues.

What you need to know today

The bottom line

Despite whatever hawkishness there is in Federal Reserve Chair Jerome Powell’s words, it seems that markets — either in a fit of optimism or misled by confirmation bias — will always seize on the most dovish of his statements and run with them. That’s what happened last week after Powell’s press conference, when markets focused on his acknowledgment that a “disinflationary process has started.” It appears the same thing occurred Tuesday after Powell’s speech in Washington DC

Analysts awaited Powell’s speech with anxiety. Markets dropped the previous day on January’s jobs report; they expected Powell to reassert the importance of interest rate hikes on the back of such a strong labor market. He unambiguously did so — and even that rates might have suggested to be increased beyond the current target of 5% to 5.25%. “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have done more and raised rates more than what is priced in,” Powell said.

Yet markets reacted buoyantly. The Nasdaq Composite was the biggest winner, gaining 1.9%. The S&P 500 rose 1.29%, and the Dow Jones Industrial Average increased 0.78%. Markets, especially the tech-heavy Nasdaq, may have been cheering the launch of new AI chatbots launched by Microsoft, Google and Baidu, which could potentially usher in a tech boom. But it’s just as likely that markets zoomed in on Powell’s mention of disinflation. And so, despite Powell’s hawkish speech, investors were bullish. The game of chicken continues.

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