FirstFT: Markets struggle to interpret Powell’s message

US stocks sank in late trading after Federal Reserve chair Jay Powell warned that the US central bank still had “some ways to go” in its quest to tame soaring prices.

Wall Street’s benchmark S&P 500 index ended Wednesday 2.5 per cent lower and the Nasdaq Composite fell 3.4 per cent after a volatile afternoon of trading as investors struggled to digest the Fed’s messaging.

Stocks initially jumped as policymakers appeared to hint they could soon slow the pace of future interest rate increases, but fell back as Powell spoke to journalists.

“Data since our last meeting suggests that the ultimate level of interest rates will be higher than expected,” the Fed chair said.

However, Powell also hinted that policymakers were willing to entertain the possibility of adopting a less aggressive increase at the Fed’s next meeting in December. “That time is coming, and it may come as soon as the next meeting, or the one after that,” he said.

Powell was speaking after the Federal Open Market Committee voted unanimously to increase the federal funds rate by another 0.75 percentage points to a target range of 3.75 per cent to 4 per cent.

Markets have rallied in recent weeks on any signs that policymakers will rein in the pace of further rate rises.

But in the real economy there are signs that consumer demand is starting to cool, particularly in the housing market which has slowed significantly under the weight of spiralling mortgage rates, which last week rose above 7 per cent.

In Europe today markets have followed the late sell-off on Wall Street and are trading lower. Futures contracts indicate a lower open for US markets later.

“Lower rate-driven volatility, all else equal, would be good for risk assets. But restrictive monetary policy — however gradually delivered — slows the economy, squeezes margins, and increases bankruptcies and defaults.”

What do you think? Is the Fed on course to avoid a recession or is it hitting the monetary policy brake too hard? Email your thoughts to firstft@ft.com or hit reply to this email and I may feature your comment in a future edition of FirstFT — Gordon

Five more stories in the news

1. Biden warns of ‘unprecedented’ threat to democracy In an appeal to voters ahead of next week’s crucial midterm elections, President Joe Biden warned that US democracy was facing an “unprecedented” threat from political candidates who “won’t commit to accepting the results of the elections they’re in”.

2. Musk plans to cut up to half of Twitter workforce The new owner of Twitter, Elon Musk, is planning to halve the social media platform’s 7,500 strong workforce. According to people familiar with the matter the overhaul could be announced as early as tomorrow. He also aims to mandate in-office work from Monday, reversing Twitter’s current policy, which allows staffers to work from anywhere, one person said.

• Related news: L’Oréal, the world’s biggest cosmetics maker, has suspended advertising spend on Twitter, as brands grow nervous that inappropriate content will spread on the platform under Musk’s ownership.

3. Hedge fund Elliott warns of more pain to come The world is on the road to “hyperinflation” and could be heading towards its worst financial crisis since the second world war, Elliott Management warned its clients in a letter seen by the Financial Times. The hedge fund, which manages about $56bn in assets, spoke of an “extremely challenging” environment where investors will find it difficult to make money.

4. North Korea fires suspected ICBM North Korea fired at least three ballistic missiles earlier today, including a possible failed intercontinental ballistic missile, stoking fears of a confrontation on the Korean peninsula. The show of force followed the most intense series of launches in North Korea’s history yesterday, when Pyongyang fired at least 23 missiles and 100 artillery shells west into the Yellow Sea and east into the Sea of Japan.

5. BlackRock opens door for retail investors to vote in proxy battles The world’s largest asset manager will allow retail investors to vote on proxy battles for the first time as it fends off criticism that its stance on environmental, social and governance issues is at odds with some of its shareholders. The one-year Voting Choice programme will be extended to include small investors in a pilot involving UK pooled funds, chief Larry Fink announced yesterday.

The day ahead

Earnings Starbucks’s third-quarter results will be the first to involve “incoming” chief executive Laxman Narasimhan. The former head of UK consumer group Reckitt Benckiser joined Starbucks last month, which has been led by founder Howard Schultz, acting as interim chief since April. Other earnings before Wall Street opens include Kellogg, Peloton, ConocoPhillips, Nikola, Restaurant Brands, and Under Armour while Warner Bros Discovery, PayPal, Coinbase, Expedia, News Corp, DoorDash, and Live Nation will report after the market closes.

Economic indicators: The Institute of Supply Chain Management’s services purchasing managers’ index is expected to have declined to 55.5 in October from 56.7 in September, meaning non-manufacturing sectors grew, but at a slower pace. Meanwhile, economists anticipate that factory orders increased by 0.3 per cent in September after staying flat in August. Elsewhere, the labour department is forecast to report 220,000 state unemployment claims for the week ending October 29, up from 217,000 the prior week.

Monetary policy The Bank of England is expected to announce its biggest single interest rate rise since 1989 today. The BoE is expected to follow the Federal Reserve and the European Central Bank and raise interest rates by 0.75 percentage points, taking its main policy rate from 2.25 per cent to 3 per cent, which would be the highest level since the financial crisis. Here are four things to watch ahead of the decision.

What else we’re reading

How long can Japan’s central bank defy global market forces? The Bank of Japan is making a giant gamble that a royal flush of national and international outcomes will solve its most pressing problems: sizeable wage increases by Japanese companies, the onset of “good” inflation, visible stability in the yen, a soft US recession and an interest rate pivot by the Federal Reserve. But at the same time, the radars of investors around the world are beeping noisily with signs of a potentially explosive Japan crisis.

The pressures undercutting the call for more oil Joe Biden wants US oil companies to boost production but two powerful forces are working against the president’s call: Wall Street wants oil groups to shower billions in profits on investors and a prediction by the International Energy Agency that oil demand will peak by the middle of the next decade.

Far-right leader Itamar Ben-Gvir emerges as Israel’s kingmaker Less than 18 months after being ousted by a sprawling, eight-party coalition, Benjamin Netanyahu appears poised to return to power. His rapid return is thanks to a large extent to the rise of an extreme-right grouping spearheaded by Itamar Ben-Gvir, an ultranationalist once convicted of incitement to racism.

Lula’s uphill battle to reverse Brazil’s environmental destruction President-elect Luiz Inácio Lula da Silva has pledged to halt destruction of the Amazon rainforest. The scale of his task is immense. Every day, an area of rainforest as big as 2,000 football pitches is razed, and deforestation has accelerated in recent months as land-grabbers try to maximise their gains before a new government cracks down.

‘I spent 10 days in a secret Chinese Covid detention centre’ The FT’s Shanghai correspondent recounts his harrowing time in an island quarantine facility after he is identified as a close contact of a Covid-19 case. “I was being ‘taken away’, as this process is commonly referred to in China,” Thomas Hale writes.

Why are Britain’s over-50s really leaving the labour market? A sharp rise in economic inactivity, notably among older workers, is of acute concern for UK policymakers. The Bank of England fears a tightening labour supply will push up wages and make high inflation persist for longer. But why are so many over-50s now staying at home?

Health and wellness

One dose of psilocybin, the active ingredient in the psychedelic class A-drug “magic mushrooms”, has a sustained and significant effect in treating cases of depression that are unresponsive to other drugs, a study has found.