Fed Meeting Preview: Powell Won’t Break S&P 500 Rally; Wage Growth Eases

If markets are right, today’s Fed meeting policy statement will announce the next-to-last rate hike of the cycle, with a quarter-point move that’s expected to be matched on March 22. However, Federal Reserve Chair Jerome Powell may have other ideas. That’s why the S&P 500 backed off from a six-week high on Monday.

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Markets firmed up Tuesday after the Employment Cost Index showed softer wage growth in Q4. However, a surprising rise in job openings reported by the Labor Department on Wednesday put the S&P 500 back on the defensive ahead of the 2 p.m. Fed meeting announcement.

Powell may make a case as to why interest rates may need to go still-higher after today’s rate hike and stay there for longer than investors are betting. Even so, Wall Street is doubling-down on its belief that rate hikes are about to end. In fact, odds for a quarter-point hike in March have fallen from 98% on Monday to 83% today, according to CME Group’s FedWatch page.

While markets could turn out to be right, today’s Fed meting is all about policymakers keeping their options open. Further, Powell has zero interest in providing fodder for the S&P 500 to move higher and Treasury yields to move lower.

The big tell will be how Powell characterizes the balance of risks. If he says that they’re now balanced between higher-than-expected inflation and lower inflation amid a weakening economy, the S&P 500 will shoot higher. But he’s probably not willing to go there yet and will continue to say that inflation risks are to the upside.

A clear S&P 500 rally signal would come if the policy statement drops language saying the policy committee anticipates “ongoing increases” in the Fed’s key interest rate. Most expect the language will remain.

Fed Meeting Minutes Fire Warning Shot

Minutes from the Fed meeting in mid-December highlighted policymakers’ concern about an “unwarranted easing in financial conditions.” Rallying financial markets could “complicate the Committee’s effort to restore price stability,” the minutes said.

That concern may have been top of mind for policymakers going into this week’s Fed meeting. That’s because the Chicago Fed’s gauge of national financial conditions through Jan. 20 showed that they were easier than at any time since rate hikes started last March.

Still, Powell’s 2:30 p.m. news conference after the Fed meeting wraps will hardly be the last word on the rate-hike outlook. Arguably, the raft of labor market data out this week will have more impact on markets than Powell.

Jobs, Wage Data Are Key

On Tuesday morning, the Labor Department’s Employment Cost Index showed compensation costs rose 1% in Q4 vs. the 1.1% expected. However, compensation rose 5.1% from a year ago, a slight uptick from the 5% growth in Q3.

Economists pay close attention to wage growth for private-sector workers, excluding those in incentive-paid occupations, as a good indicator of underlying wage growth. In Q4, pay in this category rose 0.9%, or a 3.6% annualized pace. That measure excludes occupations in which pay is driven by commissions, which may be more influenced by cyclical highs and lows.

The ECI report has elevated importance with the Fed emphasizing the need for lower wage growth to return inflation to the 2% target. Powell has said that wage growth easing to 3.5% would be sufficient.

Yet after the great news on wage growth, an unexpected 572,000 jump in job openings to 11 million in December dampened investor enthusiasm.

Powell has repeatedly highlighted the surplus of job openings relative to unemployed workers as a key reason for unusually strong wage growth. In December, the ratio of job openings to the unemployed workers rose to 1.9 from 1.7, far above the pre-Covid peak.

With consumer spending and manufacturing both showing signs of weakness, Friday’s January jobs report will provide more evidence as to whether the economy’s last major source of strength is giving way. Analysts expect a solid gain of 185,000 jobs, but average hourly wage growth is seen easing to 4.4% from 4.6% in December.

S&P 500 Set-Up

In Wednesday morning stock market action, the S&P 500 slipped 0.2%. That followed Tuesday’s 1.5% gain for the S&P 500 after tamer ECI data. Through Tuesday’s close, the S&P 500 had rallied 14% off its Oct. 12 bear-market closing low, but was still 15% below its all time high.

On Friday’s the S&P 500 crested around 4094, making a third run at clearing 4100 since the start of December. That’s the key level to watch for now. On Tuesday, the S&P 500 closed at 4076.60, right near its high for the day.

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