Stocks rise even as Fed signals three rate hikes next year

US stocks posted solid gains Wednesday after the Federal Reserve announced plans to speed up the tapering of its bond purchases and potentially raise interest rates three times next year to fight inflation. 

As stocks settle after the trading day, levels might still change slightly.

So much for Jerome Powell tanking the stock market. Investors seemed pleased (to put it mildly) with the Federal Reserve chair's performance during a press conference after the Fed indicated that it is getting ready to eventually raise interest rates.

The Dow was up more than 350 points, or 1%, in the last half hour of trading. The S&P 500 and Nasdaq were up 1.3% and 1.7% respectively.

There had been some concerns on Wall Street that traders would panic if Powell suggested the Fed was speeding up plans to slow its bond purchases and hike interest rates.

Instead, it appears that the market is happy that Powell is no longer using "transitory" to describe higher prices. It is a sign that the Fed is taking inflation seriously.

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said in a report that "rising inflation pressures are now seen as a greater priority than the Fed’s employment goals."

Mike Loewengart, managing director of investment strategy for E-Trade, added that "we’re actually seeing a market cheering the Fed’s vote of confidence in the economy, as opposed to running higher on stimulus, which it’s been doing for the past year and a half."

Conspiracy theorists believe Fed Chair Jerome Powell shifted his stance on inflation to persuade President Joe Biden to renominate him for the top central bank job.

Not so, says Powell.

He made up his mind when the got a super-high inflation report, 10 days before Biden announced his nomination, he said.

"Honestly, it had nothing to do with that at all," Powell said. "I just thought this is something we've got to do. My colleagues were out talking about a faster taper and that doesn't happen by accident. They were out talking about a faster taper before the President made his decision. ... We're always just going to do what we think is the right thing and I certainly will always just do what I think the right thing is for the economy and for the people that we serve."

The Fed isn't behind the curve in its attempt to get inflation under control, Fed Chair Jerome Powell said.

He thinks the Fed is reacting at the right time -- even as Wall Street has been sounding the inflation alarm bell all year.

"I actually think we are well-positioned to deal with what's coming, with the range of plausible outcomes that can come," Powell said. "I think that the data that we got toward the end of the fall was a really strong signal that inflation is more persistent and higher, and that the risk of it remaining higher for longer has grown, and I think we're reacting to that now and will continue to adapt our policy. So I wouldn't look at it that we're behind the curve. I would look at it that we're actually in position now to take the steps that we'll need to take, in a thoughtful manner, to address all of the issues including that of too-high inflation."

Fed Chair Jerome Powell doesn't think inflation is beyond the Fed's control. But the central bank is keeping its eye on a couple key indicators: paychecks and rent.

When paychecks rise faster than workers' productivity, businesses can start to raise prices, creating a vicious cycle. Rents can go up, too, as landlords try to keep pace with rising costs. That's not happening ... at least not yet.

"Wages are not a big part of the high inflation story that we're seeing," Powell said. "That can lead to persistent inflation. ... If you had something where real wages were persistently above productivity growth that puts upward pressure on firms and they raise prices. It would take something that was persistent and material for that to happen and we don't see that yet."

Instead, Powell said consumer costs and supply chain issues are the primary drivers of inflation. That's why the Fed continues to believe inflation will remain a short-term problem.

Fed Chair Jerome Powell wasn't always concerned about inflation. He had called it "transitory," a word the Fed has since retired because it was getting conflated with "temporary."

But Powell admitted today that he had, in fact, believed that inflation would be a temporary problem -- and that hasn't been borne out.

He detailed how he started to see surprisingly and stubbornly high inflation in the fall and began to consider that the Fed's dovish inflation policy was misplaced.

"In September -- I'd say after Labor Day -- it started to become clear that this was both larger in its effect on inflation and more persistent," Powell said. "We got the ECI [Employment Cost Index] reading on the eve of the November meeting. It was the Friday before the November meeting and it was very high. ... Two days after the meeting we got a very strong employment report, and revisions to prior readings and no increase in labor supply and the Friday after that we got the CPI [Consumer Price Index] which was a very high reading. And I honestly at that point really decided I thought we needed to look at speeding up the taper."

Fed Chair Jerome Powell is worried about the Omicron variant. But not so much that he and the rest of the central bankers believe a course-correction was necessary in its decision to wind down emergency stimulus.

"I do think [with] wave upon wave people are learning to live with this," Powell said. "More and more people are getting vaccinated so people who get the new variant, it affects them much less than it tends to effect in the aggregate people who are not vaccinated...So it can have an economic effect. I just think at this point we don't know much. We'll know a whole lot more in 3 weeks and we'll know more than that in 6 weeks."

Given the uncertainty around Omicron, the Fed believed it was appropriate to accelerate its pandemic-era stimulus wind down to fight inflation.

"if you look at the state of the economy and the strength of overall demand, the strength of demand for labor ... I think moving forward at the end of our taper by a few months is really an appropriate thing to do and I think really omicron doesn't really have much to do with that," Powell said.

Fed Chair Jerome Powell was glowing today in his praise for the job market. Well, except for one part: the labor shortage.

Despite 4.2% unemployment -- a rate that has plunged over the past several months -- job openings remain stubbornly high, and America still has millions of out-of-work people sitting on the sidelines.

"We don't have a strong labor force participation recovery yet, and we may not have it for some time," Powell said.

Powell blamed a number of factors, including concerns about rising Covid infections and early retirements. Still, he defended the Fed's decision to speed up its winddown of emergency stimulus to fight inflation -- even though that might hinder job growth.

"We have to make policy now, and inflation is well above target," he said.

"Jobs" was Fed Chair Jerome Powell's defense of the central bank's decision to wind down its purchases and (probably) start raising rates next year.

"We are making rapid progress toward maximum employment," he said.

Powell said the economy is back on track, and inflation poses a much more serious threat than potentially slowing the economic progress America has made since the beginning of the pandemic.

"The economy is so much stronger now, so much closer to full employment," Powell said. "Inflation is running well above target and growth is well above potential."

So, Powell said, the Fed doesn't expect a big delay between tapering its asset purchases and raising rates. But he noted the timing of rate hikes isn't something the Fed has focused on yet.