The stock market soared to new heights on Friday morning, with several major market benchmarks hitting record levels. The move higher reflected new optimism about the ability for the economy to keep recovering at a reasonable pace despite ongoing challenges on multiple fronts. As of shortly before noon EDT, the Dow Jones Industrial Average (^DJI -0.93%) was up 221 points to 35,435. The S&P 500 (^GSPC -0.71%) gained 35 points to 4,505, and the Nasdaq Composite (^IXIC -0.81%) rose 162 points to 15,108, both standing to set new records if the indexes close at or above those levels.

The key catalyst for Friday's gains was the Federal Reserve. Fed Chair Jerome Powell made comments at the central bank's Jackson Hole symposium on Friday morning, and they painted exactly the picture that market participants most wanted to see.

View of top front of Federal Reserve building.

Image source: Getty Images.

What Powell's speech said

Powell's speech was entitled "Monetary Policy in the Time of Covid." While the Fed chair likely meant his allusion to the Gabriel Garcia Marquez to be amusing, market participants were deadly serious in weighing whether the central bank leader would be able to thread the needle and keep increasingly jittery markets satisfied with their views of the future.

Powell started out by noting how different this recovery is from previous ones. Usually, an economic downturn leaves consumers with less ability to spend, contributing to depressed conditions. However, the monetary and fiscal policy support that the U.S. government has provided has created a much different situation in which manufacturers and suppliers have been unable to keep up with demand because of the production limitations that the pandemic brought about.

Despite signs of a broad recovery, Powell noted that it has been quite uneven. That's largely because the pandemic itself had very disparate effects across the economy, crushing areas like travel and leisure while actually supporting technology providers who could offer solutions to the unique challenges during the pandemic. Employment trends reflected that disparity, and so has the recovery in those critical sectors of the economy.

On the employment front at least, Powell was upbeat. Job gains have picked up steam, and job switching has reached record levels. Yet unemployment rates are still higher than desired, especially given the number of employers reporting difficulty finding workers.

Meanwhile, the Fed chair sought to dispel concerns about inflation. Powell argued that the biggest price gains have been in narrow areas, and those niches have started to see inflation rates moderate. Wage increases have been measured and pose little threat of spiraling upward to create inflationary pressure. Moreover, international trends support disinflationary forces, and that could provide a check against higher inflation even if U.S. economic factors suggest higher prices ahead.

So what's the Fed going to do?

As is typical for Fed speeches, Powell committed to as little as possible. On one hand, he suggested that tapering the Fed's quantitative easing purchases of bonds could be appropriate in the near term. On the other, he affirmed the Fed's overarching goal of supporting the economy as long as necessary.

In this case, investors pretty much wanted the Fed to commit to as little as possible. Bond yields moved lower after having risen in anticipation of the speech, as bond investors foresee a hesitance from the central bank to make direct interest rate changes via the federal funds rate anytime soon. Stock investors like that as well, especially because many of the high-growth stocks that have done so well over the past 18 months have relied on cheap financing and the emphasis on future results that low rates foster.

Of course, what the Fed wants isn't necessarily what the economy will provide. Surprises could throw a monkey wrench in the central bank's plans, but at least for now, investors are more than content with what they're seeing from the Fed.