A stock index curve sits on a display screen above a toy model bull at the Frankfurt Stock Exchange, operated by Deutsche Boerse AG, in Frankfurt, Germany (Photographer: Krisztian Bocsi/Bloomberg)

Bulls Cheer as Fed's Capitulation to Markets Reaches Climax

(Bloomberg) -- A stock-market spring-loaded for earnings season is now pushing toward its biggest January rally in three decades after Federal Reserve Chairman Jerome Powell sent another care package to investors bruised in last year’s market tumult.

The S&P 500 jumped as much as 1.9 percent, its first gain on the day of a Fed decision since Powell took office and its biggest increase for such a session since 2014. The sense of relief among investors was on display across markets worldwide, with developing-nation equities hitting the highest level in almost four months, Europe’s Stoxx 600 advancing a third-straight day and almost every major currency gaining versus the dollar.

Stocks took off after the Fed chairman evinced more willingness to be patient before hiking rates and said other stimulus programs could be adjusted “in light of economic and financial developments.” In short, investors convinced policy makers were ignoring their plight in December have a lot less to worry about now.

Bulls Cheer as Fed's Capitulation to Markets Reaches Climax

“The Fed threw in the towel today, taking rate increases off the table,” Andrew Brenner, the head of international fixed-income at Natalliance Securities in New York, said after the announcement. “We have never seen the Fed reverse cold turkey as fast as they have since the last meeting.”

It was the third time since the FOMC’s last press conference that Powell walked back hawkish testimony that pushed the S&P 500 to a 9.2 percent decline in December. Four weeks ago, Powell said he was “listening carefully” to financial markets and signaled a willingness to consider changes to the Fed’s gradual run-off of its balance sheet in any policy review.

“The FOMC obviously got scared of the downside financial risks and the recent slowing and caved,” said Ilya Feygin, senior strategist at WallachBeth Capital LLC. After Powell’s remarks, the dollar weakened to a four-month low and the Treasury yield curve steepened as the two-year rate crashed to the lowest since October.

The Fed “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support” a strong labor market and inflation near 2 percent, the central bank said in a statement Wednesday following a two-day meeting in Washington.

Bulls Cheer as Fed's Capitulation to Markets Reaches Climax

For his part, Powell -- who was repeatedly blamed by President Donald Trump for provoking market volatility in December -- said his focus hasn’t changed. Flexibility over how to manage the Fed’s balance sheet reflects thinking that has gone on “for frankly years” and Wednesday’s press conference was an effort to provide clarity.

“Honestly my only motivation is to do the right thing for the economy and for the American people, that’s it, and the situation I think calls for patience, I think it does, and the stance of policy we think is appropriate. We see these uncertainties and we see a time where we can afford to, when we have the luxury of being able to wait, and watch, and that’s what we’re planning to do.”

Implied yields on fed funds futures slipped after release of the FOMC statement, suggesting a less than 10 percent chance of a quarter-point increase this year. Odds of a rate reduction in 2020 increased. Government bonds rose around the world in line with U.S. Treasuries.

Powell Gives Emerging-Market Traders the Gift They Hoped For

In a separate special statement on Wednesday, the Fed said it’s “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.” The central bank also said it would be ready to alter the balance sheet’s size and composition if the economy warrants a looser monetary policy than the federal funds could achieve on its own.

The Fed “delivers a market-friendly dovish blast with both barrels of the shotgun: dovish on rates and dovish on balance sheet,” said Krishna Guha, head of central bank strategy at Evercore ISI. “This exceeds even our above-consensus expectations.”

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