What is a rally in the stock markets? U.S. stock index futures traded lower on Friday and Treasuries retreated from their highs as many U.S. policymakers began setting the stage for Chairman Jerome Powell’s highly anticipated speech. The Fed chief’s statements will help shape opinion on the pace of monetary policy tightening.

Rally in the stock markets at the moment

S&P 500 and Nasdaq 100 futures are down 0.2% and 0.3%, respectively. The yield on the 10-year Treasury note rose about five basis points to 3.08%. In addition to Powell’s speech later Friday, traders will take a look at a slew of fundamental statistics, including personal spending by citizens and the Fed’s preferred inflation gauge, which will record a decline in price pressure.

Mining stocks continued to rally in stocks Friday as prices of iron ore, copper and other industrial metals rose after China’s latest effort to stimulate its weakened economy.

Going back to Powell, who may confirm the Fed’s determination to keep raising interest rates to combat high inflation, it is not just the willingness to raise them, but also the pace of further tightening. Many experts are already claiming a hawkish scenario, rejecting expectations of moderate tightening.

This is the backdrop for the rebound in stocks and the decline in bonds. Another question is whether Powell will try to reset market expectations to make sure that economic activity slows further. Obviously, a dovish reversal would play well in the hands of buyers of risky assets who are looking forward to further stock market recovery. 

But if the Fed backs off its targets now, the fight against inflation could drag on for years to come, and then the economy has a chance of not only slipping into recession, but everything spilling over into a full-blown crisis, starting with the housing market and ending with the labor market and stagnant manufacturing and services sectors. If Powell leaves any hope of a dovish reversal, we could see yields plummet and stock markets end the week at their highs.

Other central bankers have already stressed the need for further rate hikes. Kansas City Fed President Esther George said interest rates cannot be ruled out even above 4%.

Earlier we reported that major U.S. stock indexes are moderately rising in anticipation of the Fed’s decisions.