Fed Chairman Jerome Powell spoke harshly on Wednesday, promising more rate hikes in the relentless battle against inflation, but he also released a few remarks mild enough to send the stock market up sharply. As expected, the Federal Reserve raised interest rates by a quarter point on Wednesday afternoon and also said in its statement that it expects continued rate hikes. Equities initially slumped and bond yields, which move in the opposite direction to bond prices, rose. Speaking at a press conference afterwards, Powell warned the market of more rate hikes and a tough stance on inflation. But traders seemed to pick up on comments that tended to be mild, and the stock market reversed course and rebounded hard. Bond yields fell. Powell said the Fed’s work was not done yet, but it was “gratifying to see the disinflation process underway, with a continued strong labor market.” “The markets are heading for the races. They read this as mild. I think it was ‘satisfactory’ and ‘disinflation’ were two words the market used,” said Diane Swonk, chief economist at KPMG. “The problem is, from the Fed’s perspective, they’re not done yet. He stood his ground, but the market took ‘satisfied’ and ‘disinflation’ and ran with it.” Swonk said markets held fast to those words, though Powell warned the Fed is concerned the slowdown in inflation could reverse. “It was aggressive humility, because he’s clearly humbled by the slowdown in inflation, but he also doesn’t waver from his and the Fed’s view that it will take time,” Swonk said. Powell also said he expects there is a chance the Fed can meet its 2% inflation target without much economic deterioration. “I actually thought he did a pretty good job. It was kind of a hawkish thing at first,” said James Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management. Then “he just said we’re talking about a few more hikes, and I think that’s what the market is after. A couple is generally two. That could be one hike in March and maybe another one in May. ” The Fed rate hike on Wednesday brought the interest margin of the Fed Funds to 4.50% to 4.75%. The Fed has targeted a range of 5% to 5.25% as a final rate or end point. Caron said the market seems happy with that level, and bounced back when Powell’s comment about “a few more hikes” suggested the Fed could stop there. “For the markets, that’s like ‘so you tell us this it!” Karon said. The S&P 500 soared above 4,100 in the rally launched by Powell. That’s an important level that strategists were looking at because it was the high point of December. At the same time, bond yields fell and the 10-year Treasury yield fell to 3.4% from levels of just under 3.5% earlier in the day. .SPX 1Y line stock Michael Schumacher, head of macro strategy at Wells Fargo, said Powell’s overall tone was subdued, although he delivered an aggressive message. “The statement was fine. It had the desired response, and yet he came out of the press conference throwing out his comments that he didn’t want to tighten up too much,” he said. “People got all excited when he said that.” Strategists had expected Powell to do his best to sound aggressive as the Fed doesn’t want to create easier financial conditions. Stocks traded higher as investors continue to expect a soft landing, a fall in inflation and ultimately a Fed pivot to cut rates. One risk is that easier financial conditions, as reflected in equity and credit rallies, could lead to even more inflation. US10Y 3M 10-Year Line The futures market Wednesday afternoon began pricing in lower Fed Funds rates at the end of the year, implying a greater likelihood of a rate cut. BMO interest rate strategist Ben Jeffery said Fed Funds futures showed a closing rate of 4.89% in the December contract, down from 4.92% on Tuesday. “I think the bar for him to be hawkish was set very, very high. The market was ready for anything he said, which could possibly be taken as gentle,” Jeffery said. “That’s all everyone was looking for and that’s what played out.” Jeffery said the Fed could also have indicated that it would no longer raise interest rates by more than a quarter point. In its statement, the Fed swapped the word “tempo” for “magnitude” of future rate hikes when describing what it would consider when making decisions about further hikes. “For me, they shift from how fast to how high,” he said. He said this means the Fed’s focus is on how many additional hikes rather than how big.