U.S. stocks ended the day in positive territory following choppy trading Thursday as investors considered the risks of an economic downturn and the Fed’s commitment to curbing inflation.
The Dow Jones industrial average rose nearly 200 points, or 0.64%, at the closing bell, notching a victory after flirting with losses throughout the day.
The S&P 500 rose almost 1%, while the tech-heavy Nasdaq composite index increased 1.6%.
Federal Reserve Chair Jerome Powell faced his second day of questioning on Capitol Hill.
He was pressed by lawmakers on the House Financial Services Committee to address the challenge of combating accelerating prices while also avoiding a recession that could be sparked by the Fed’s moves.
Powell insisted that pulling inflation down is the top priority.
Over his two days of testimony, he also grappled with questions about supply issues beyond the control of the Fed and its power to set interest rates, highlighting the limits of the central bank’s influence.
Both Washington and Wall Street are closely scrutinizing the Fed’s latest rate hike, which amounted to the largest increase since 1994.
The jump of three-quarters of a percentage point is part of the Fed’s new aggressive strategy to rein in decades-high inflation.
But the tight monetary policy carries significant risk. Higher interest rates could slow the economy too quickly, leading to mass layoffs and a recession, all without putting a dent in the high prices of goods still facing supply snarls provoked by the pandemic.
Inflation reached a new peak in May – climbing 8.6% year over year – signaling that the Fed’s policies to contain the soaring cost of food, fuel, housing and other necessities are not yet having a robust impact.
That has shaken the confidence of both consumers and investors and underscored the growing likelihood of a recession.
Citing higher interest rates and low consumer demands, analysts at Citigroup and Deutsche Bank predicted 50% odds for a coming recession.
But the Fed is unlikely to lower the interest rate without seeing clear evidence that the economy is calming, Powell said during his testimony before the House committee on Thursday.
Investors have a number of economic data points to parse through. The yield on the benchmark U.S. 10-year Treasury note to 3.08%, its lowest in two weeks. Bonds yields move conversely to prices.
In the manufacturing and services sector, the U.S. Manufacturing Purchasing Managers’ Index dropped to 52.4 in June compared with 57 the previous month.
The Services PMI fell to 51.6 from 53.6 in May.
S&P Global published the index after surveying more than 300 business executives, where the respondents rate metrics such as output, cost and employment, offering insights into business conditions.
Naeem Aslam, chief analyst at AvaTrade, said the decreasing numbers will push investors further to the edge.
“The survey data are consistent with the economy expanding at an annualized rate of less than 1% in June, with the goods-producing sector already in decline and the vast service sector slowing sharply,” said Chris Williamson, chief business economist at S&P Global Market Intelligence, in a report.
As hundreds of households cut back on nonessential goods and activities, such as travel and dining, producers saw the first contraction in new orders since July 2020.
Employment was curtailed because of both supply and demand challenges.
The S&P Global report said manufacturers and service providers found it difficult to hire or retain workers, while the decreasing consumer spending made employers hesitant about replacing goers.
New jobless claims fell by 2,000 to a seasonally adjusted 229,000, according to new data released Thursday by the Labor Department, indicating that the number of Americans filing for unemployment benefits has remained relatively stable for the year.
A widely followed proxy for layoffs, the level of jobless claims will be closely scrutinized for hints of a weakening labor market, as the Fed pursues a more aggressive monetary policy and fears of a potential recession grow.
To home buyers, the rising cost of borrowing has overstretched an already challenging housing market. Freddie Mac’s latest data showed that the weekly average 30-year fixed-rate mortgage – the most popular home loan product – rose to 5.81%, nearly double what it was a year ago.
The combination of rising mortgage costs and high housing prices, which reached $428,700 on average, according to Fed data, could force a decline in sales.
“However, in reality many potential home buyers are still interested in purchasing a home, keeping the market competitive but leveling off the last two years of red-hot activity,” Freddie Mac analysts wrote.
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