- Risk-on sentiment returned to the stock market on Thursday after the Fed acknowledged inflation is falling.
- Fed Chairman Jerome Powell mentioned the word "disinflation" 13 times during Wednesday's FOMC speech.
- Beaten down stocks like Carvana and Bed Bath & Beyond soared as interest rates fell in Thursday's session.
A risk-on sentiment returned to the stock market on Thursday after Federal Reserve Chairman Jerome Powell acknowledged that inflation is falling.
Shares of high-risk companies like Carvana and Bed Bath & Beyond, who's future remains in doubt due to potential bankruptcy, soared more than 20% on Thursday.
Powell said the word "disinflation" 13 times during his FOMC press conference, a significant turnaround from prior meetings. That acknowledgement helped spark a decline in interest rates, even though the Fed hiked the effective Fed Funds rate by 25 basis points and signaled that more rate hikes are likely.
But the market isn't so sure that it believes the Fed will continue to hike interest rates. While the CME Fed WatchTool suggests a 25 basis point rate hike in March is likely before a pause in rate hikes, Morgan Stanley believes Wednesday's rate hike was the last of this cycle.
"The disinflationary process is underway and combined with a weaker labor market we think the incoming data and forecast revisions to the March SEP will lead the Fed to pause at its next meeting," Morgan Stanley said in a Wednesday note.
And some investors, like Wharton professor Jeremy Siegel, think the Fed is going to cut interest rates by the end of the year due to falling inflation, a mild recession, and a potential contraction in job growth.
"I really think we're going to have a large decrease in rates in the second half of the year because of the weakening economy and because of the dramatic slow of inflation," Siegel said in an interview with CNBC on Thursday.
The 10-Year US Treasury yield fell 6 basis points on Thursday to 3.37%, representing its lowest level since September.
The drop in interest rates helped spark a significant rally in beaten down stocks on Thursday, with the technology sector leading the way. Mega-cap tech stocks like Amazon, Alphabet, and Tesla, which fell more than 30% in 2022, surged 6% in Thursday trades.
Whether the risk-on environment can last will hinge on future inflation readings, the jobs market, and whether the Fed continues with hawkish moves to raise interest rates and reduce its balance sheet.