Global markets rebound on balanced Fed message

Global equity markets rebounded on Friday as Federal Reserve chair Jerome Powell struck a nuanced tone at the Jackson Hole summit that provided enough dovishness to buoy stocks after his hawkish warnings on inflation.

In his pivotal speech, Powell reiterated the Fed’s ironclad commitment to raising rates as high as needed to tame price pressures. But he also stressed uncertainties around the outlook and said policy must remain “nimble” in response.

This balanced messaging sparked a rally on Wall Street that lifted other markets after stocks swung earlier. The Dow surged 0.7%, the S&P 500 climbed 0.7% and the tech-heavy Nasdaq rallied 0.9% to end near session highs.

The turnaround boosted European shares as well, with the region’s STOXX 600 index paring losses to close flat on the day. The euro had earlier tumbled to two-month lows against the dollar on lowered ECB hike bets before recovering.

In bonds, Treasury yields held near recent peaks as fixed income investors focused on Powell’s hawkish tone. But bets on more aggressive Fed tightening over coming months diminished after the speech pointed to data dependency.

“There was a little something for everybody in Powell’s remarks,” said David Sadkin of Bel Air Investment Advisors. “Restrictiveness for bears, and hints of flexibility for bulls.”

Still, the Fed chair gave little indication that the central bank would pivot from its priority on fighting still-high inflation. His warnings drove an initial bond selloff and lifted the dollar.

Powell indicated the Fed will keep raising rates and hold them at restrictive levels to squeeze out inflation fully. But he noted the “unusually large” uncertainty and said policy will respond nimbly, relief for stocks.

The gains came despite ongoing headwinds like Europe’s growth challenges, China’s slowdown and recession risks from rapid tightening. But Powell’s nod to flexibility over Fed policy tempered some worries.

His careful balancing act shows officials are attentive to risks while staying resolute on inflation. This dual message explains markets’ upbeat reaction. However, another hawkish shift could easily revive volatility.