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The Dow bounced back from a brutal loss after tame inflation data further decreased the odds of a crippling interest rate hike. | Source: REUTERS/Brendan McDermid

Dow Reverses Brutal Loss as Tame Inflation Keeps Fed Hawks at Bay

By CCN: The Dow and broader U.S. stock market were under pressure Friday morning after the Trump administration raised tariffs on $200 billion worth of Chinese goods, setting the stage for a prolonged and potentially damaging trade war with Beijing. Equity markets would later reverse their declines as investors parsed through tame inflation data that seemed to support the Federal Reserve’s neutral outlook on monetary policy.

Dow, S&P 500 Erase Losses

All of Wall Street’s major indexes managed to recover on Friday, reversing brutal declines earlier in the session. The Dow Jones Industrial Average turned positive in late afternoon trading, climbing 114.01 points, or 0.4%, to 25,942.37. The blue-chip index was off by as much as 359 points, which reflected a volatile pre-market for Dow futures.

Dow Jones

Dow Jones Industrial Average reverses losses Friday as stocks recover. | Chart via Yahoo Finance.

After falling more than 1.5%, the broad S&P 500 Index of large-cap stocks reversed course to close up 0.4% at 2,881.40.

Meanwhile, the Nasdaq Composite Index rose 0.1% to 7,916.94. The tech-driven average was off by 1.9% through the morning.

Tame Inflation Keeps Hawks at Bay

Economic data were also a factor in the stock market’s performance on Friday after the Department of Labor said consumer prices increased slower than expected in April.

The consumer price index (CPI) of goods and services rose 0.3% in April and 2% annually, slightly below expectations on both fronts. So-called core inflation, which strips away volatile goods such as food and energy, edged up 0.1% during the month and 2.1% annually, official data showed.

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Tame inflationary pressures should keep the Federal Reserve neutral for now. | Source: Shutterstock

The Federal Reserve targets inflation at 2% annually but relies on a measure called the core personal consumption expenditure index to track price growth. Nevertheless, tame CPI data likely means the Fed is justified in keeping monetary policy on hold.

Following the April 30-May 1 policy meeting, Fed Chair Jerome Powell said there was no justification for adjusting interest rates in either direction. Initially, investors took that to mean that their desired rate cut is unlikely to materialize this year.

Prior to the meeting, traders were banking on a rate cut in the next eight months, according to the Fed Fund futures prices.

Click here for a real-time Dow Jones Industrial Average price chart.