Dow, S&P 500 climb after Powell says Fed isn’t trying to provoke recession with higher interest rates

U.S. stock indexes were higher in choppy trade Wednesday after Federal Reserve Chairman Jerome Powell reiterated his commitment to combat inflation, while also suggesting the economy was strong enough to withstand higher interest rates.

How are stock indexes trading?

• The Dow Jones Industrial Average DJIA, 0.71%gained 125 points, or 0.4% to trade around 30,643, after flipping between small gains and losses.
• The S&P 500 SPX, 0.85%rose 19 points, or 0.5% to around 3,783.
• The Nasdaq Composite Index COMP, 0.95%was up 67 points, or 0.6% to around 11,137.

Following a long holiday weekend, the Dow Jones Industrial Average  DJIA, 0.71% rallied 641.47 points, or 2.2%, to finish at 30,530.25 on Tuesday. The S&P 500  SPX, 0.85% rose 2.5% to 3,764.79, and the Nasdaq Composite  COMP, 0.95% climbed 2.5%, to finish at 11,069.30.

With the Dow’s roughly 15.9% decline so far in 2022 it was on pace for its worst first-half to a year since 1962 when it fell 23.2% in six months, according to Dow Jones Market Data.

What’s driving the market?

Investors were facing stinging losses in the year’s first half and weighing comments from Fed Chairman Powell who vowed on Wednesday to bring down inflation through additional interest rate hikes, while testifying on Capitol Hill.

“The American economy is very strong and well positioned to handle tighter monetary policy,” Powell said, in remarks to a Senate Banking Committee hearing.

Powell also said that a recession was “certainly a possibility,” but not the intended consequence of monetary policy moves.

See: Powell says U.S. economy can handle the additional rate hikes that are coming

“Powell assured markets he will do everything he can to get inflation back down,” said Peter Cardillo, chief market economist at Spartan Capital Securities, by phone. “And it comes at a price. That price is a potential recession.”

Despite the Fed’s warning, stocks were higher with the market already “discounting inflation, a recession and a very bleak economic scenario,” Cardillo said, adding that he expects stocks to stay in the current trading range until fresh corporate earnings reports emerge in about 15 days, giving investors a better picture of how American businesses are holding up with costs of living at a 40-year high.

“Nothing really new or groundbreaking was communicated in his [Powell’s] statements and his testimony. And that is an incremental positive in that it just removes the overhanging concern that he’s growing increasingly hawkish with every meeting, which is not really rational,” Keith Buchanan, senior portfolio manager at GLOBALT Investments, said in an interview.

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Sen. Elizabeth Warren, a Democrat from Massachusetts, warned Powell on Wednesday not to make things worse for families. “Inflation is like an illness, and medicine needs to be tailored to the specific problem,” she said. “You could actually tip the economy into a recession.”

Chicago Fed President Charles Evans said on Wednesday that he backs raising the fed fund rate target to a range of 3.25% to 3.5% this year, and to 3.8% by the end of 2023, as the Fed looks to battle inflation.

While stocks were higher, money was flowing into traditional havens such as bonds. The yield on the 10-year Treasury note TMUBMUSD10Y, 3.158% fell 15 basis points to 3.15%, a day after its biggest jump in seven days. 

U.S. crude oil prices CL.1, -2.44% dropped 2.3%, after dipping near its lowest level in about six weeks.

In addition to demand worries fueled by recession concerns, the White House on Wednesday said it is calling on Congress to suspend the federal gasoline tax for three months while also asking states to provide similar relief.

The federal government charges an 18 cent tax per gallon of gasoline and a 24 cent tax per gallon of diesel. A “gasoline tax holiday, while supporting consumers, would support demand, thereby prolong the period of tightness,” said Ole Hansen, head of commodity strategy at Saxo