US Stock Market After Hours: Fed Chairman Hawkish, Rate Hike Likely, Biden Talks Vaccine in Debut, Banks Allowed to Increase Stock Buybacks

Yesterday (25th), Federal Reserve (Fed) Chairman Jerome Powell stated in an interview that as the economy gradually recovers, the scale of bond purchases will be reduced. His remarks initially led to a downturn in the stock market in early trading; however, with President Joe Biden's debut press conference and positive data released by the Labor Department, the stock market rallied sharply towards the end of the session. Here are the key points after the market closed:

Fed Chairman Jerome Powell pointed out in an interview with NPR yesterday that as the economic recovery progresses, the purchase of bonds will be reduced. Powell stated, "As we make substantial further progress, we'll gradually reduce the pace of purchases of Treasury bonds and mortgage-backed securities (MBS)."

"Once the economy has fully recovered, we will withdraw the support provided in times of emergency, and this process will be gradual and quite transparent."

Advertisement - Please scroll down for more content

Although Jerome Powell's remarks were measured, the market still interpreted them as hawkish, especially considering the earlier statement by Robert Kaplan, President of the Federal Reserve Bank of Dallas, that an interest rate hike in 2022 is not ruled out. Therefore, many believe that the possibility of the Fed tapering (reducing bond purchases) in September has significantly increased.

However, there are differing views among Fed officials, with most officials, including Charles Evans, President of the Federal Reserve Bank of Chicago, concurring that the U.S. unemployment rate could drop to 4.5% this year, but inflation rates remain too low, indicating that the actual rate hike may not occur until 2024.

Biden's Debut Press Conference

Jerome Powell's remarks also led to a downturn in the US stock market in early trading, with technology and bank stocks leading the decline. However, as US President Joe Biden made his debut press conference, the US stock market gradually strengthened.

During the press conference, Joe Biden discussed the progress on the pandemic and stimulus package. He originally planned to increase the vaccine coverage to 100 million people within his first 100 days in office, a goal that was achieved ahead of schedule on his 58th day in office. As a result, he raised the 100-day target to 200 million people and also expected that kindergarten through 8th-grade students could return to campuses by his 100th day in office.

Furthermore, the US government has already sent out $1,400 relief checks to 100 million American citizens, and the number of jobless claims on the 24th is also declining, indicating that economic recovery is on track.

According to data released by the US Department of Labor, the number of people receiving unemployment benefits last week was 680,000, down 100,000 from the previous week, marking the first time it has fallen below 700,000 since the outbreak of the pandemic. This indicates that as vaccine coverage increases and businesses reopen, employment data is improving.

As of March 13th, the number of ongoing unemployment claims in the US is 3.87 million, better than the expected 4 million.

Banks Allowed to Increase Stock Buybacks

While Jerome Powell's remarks have raised concerns in the market about a possible balance sheet reduction by the end of the year, the actual message is that the economy is improving.

The Fed announced after the US stock market closed that if banks can pass the latest round of stress tests by June, they can increase dividends this year and ramp up stock buybacks.

According to CNBC, last June, the Fed restricted banks from issuing dividends and buying back shares to ensure they have ample funds to face future risks. However, now, as long as banks prove they can meet minimum capital requirements in the new round of testing, these restrictions will be lifted.

In a statement, Federal Reserve Vice Chairman Randal Quarles said:

"The banking system remains a source of strength in the economy, and returning to our normal framework after this year's stress test will help ensure that banks remain competitive."

As Bridgewater Associates' Ray Dalio previously mentioned, the next moves by central banks are signals to the market. If an increase in quantitative easing signals they are facing supply-demand imbalances, then a reduction in quantitative easing would be a positive sign: the real economy is recovering.

However, economic recovery and stock market fluctuations may not be directly correlated. The market is currently facing two themes: the Fed turning hawkish, possibly tapering by the end of the year, and the economic boost from the US government's $1.9 trillion stimulus package. How the market will react remains another key observation point.