The Nasdaq fell 1% intraday as Powell said stock market valuations are high and gave no hint of a rate cut in October.
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On Tuesday, Federal Reserve Chairman Jerome Powell stated that asset prices are currently at relatively high levels.
In a speech in Providence, Rhode Island, during the Q&A session, Powell was asked to what extent he and his colleagues pay attention to market prices, and whether they have a higher tolerance for high valuations. Powell stated:
We do monitor overall financial conditions and ask ourselves whether our policies are affecting financial conditions in the way we expect. But you’re right, by many measures — such as stock prices — current valuations are indeed quite high.
The term “assets” above generally includes stocks and other risk instruments.
Prior to last week’s Federal Reserve policy meeting, as markets became increasingly convinced that the Fed would lower its benchmark interest rate, stocks and other assets rose sharply. Since the 0.25 percentage point rate cut was announced on Wednesday, U.S. stocks have continued to climb, with multiple major indexes hitting new record highs.
Speaking on mortgage rates, Powell mentioned: “The market listens to what we say and then makes its own judgments, estimating where they think rates are headed. So they price those expectations in.”
Although Powell mentioned stock market valuations are on the high side, he also stated that this is not currently a time of elevated financial stability risks.
After Powell’s remarks, U.S. stocks turned lower, with all major indexes falling. The Nasdaq dropped 1% intraday, the S&P 500 fell over 0.6%. Large technology stocks led the decline, with Nvidia dropping the most. The 10-year U.S. Treasury yield fell 3 basis points to 4.12%. The U.S. dollar was volatile. Gold held at record highs. Due to tensions between NATO and Russia, oil prices rose.
On Powell’s comments about the stock market, Krishna Guha of Evercore said:
While some hawkish Fed officials put significant weight on market movements and view this as a reason to be cautious about further rate cuts in the near term, this is not the view of Powell and the core group.
Powell declined a clear invitation to express concern about the stock market rally or to hint that the Fed’s dovish stance was wavering due to asset prices.
He agreed with the questioner that, by historical standards, stock prices are indeed highly valued, and noted the Fed watches financial conditions. But he made it clear the Fed’s job is not to watch stock prices or determine what counts as fair value. In other words, employment and inflation come before stock prices.
Additionally, analysts noted, Powell’s recent remarks did not give any hint as to whether the Fed will cut rates at the October meeting, nor did he offer any new information, which also contributed to the stock market’s intraday drop.
On Powell’s latest comments on Tuesday, David Russell of TradeStation said:
Powell is laying the groundwork for tariffs in the fourth quarter to push up inflation, leaving room for possible price pressures to rise. He allows Fed officials leeway to cope with political pressure, while toning down his comments by emphasizing the impact is short-term.
Powell doesn’t want to anger the White House, but he’s also not giving in easily. He does not want to appear hawkish, but is also avoiding calls for aggressive rate cuts.
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