Why did central bank watchers position Powell’s speech as hawkish?

2022-06-13 0 By

Fed Chairman Jerome Powell sent a clear message this week: Growth is strong and inflation must come down, according to MarketMatrix.net.Distraught stock traders realized they couldn’t count on him this time.The S&P 500 wiped 2 percent off the day and recorded its biggest one-day decline in nearly two years.The 2-year Treasury yield had its biggest one-day gain since March 2020, jumping 13 basis points.For bulls, the problem started not with the Fed’s policy statement but with Mr Powell’s speech, when he refused to reassure investors that the pace of rate rises would be gradual.Instead, he said the strength of the economy and employment should make the Fed flexible, which investors interpreted as Mr Powell building expectations for a more aggressive policy path.”Powell’s desire for flexibility is seen as hawkish given his comments on inflation,” said Samir Samana, senior global market strategist at Wells Fargo.It sounds like he acknowledges that the Fed is behind the inflation curve and cannot commit to a path that will not disrupt financial markets.””The tone of Powell’s press conference was hawkish,” said Neil Dutta, head of economic Research at Renaissance Macro Research.The Fed would be more willing to raise rates more quickly in the face of an upside surprise on inflation than to ease in the face of a downside surprise on employment.”Wild daily swings have plagued stocks since early last week, when President Joe Bide said the Federal Reserve’s job was to rein in the highest inflation in decades and support the central bank’s plans to withdraw stimulus.Powell’s performance on Wednesday was in line with that expectation.He was asked about the possibility of raising rates “earlier” by more frequently than at other meetings.His answer focused on the strength of the economy but did not specify a timetable for withdrawing stimulus measures.”We know the economy is at a very different level than when we started raising rates in 2015,” he said.Specifically, the economy is much stronger now.The Labour market is much stronger.Inflation is above our 2 per cent target – well above where it was then.These differences could have important implications for the appropriate pace of policy adjustments.”There was no concession that recent market volatility would not pose an immediate obstacle to the central bank tightening policy.”I really don’t think asset prices per se pose a significant threat to financial stability,” he said.That’s because household finances are in good shape, corporate finances are in good shape, commercial loan defaults are low, things like that.”More than $5tn has been wiped off stock market value this year as traders struggle to price the uncertain course of future rate rises.Markets have been pricing in four rate rises this year, but that number has risen to five as Mr Powell has signalled that the economy and Labour market could withstand a faster pace if necessary.”There’s no money left in the Fed’s put options,” said Peter Birkall, chief investment officer at Bleakley Advisory Group.Asset holders are reminded that we have many quarters before monetary tightening, please fasten your seat belt, if you haven’t already, you better fasten your seat belt.”Higher interest rates do not always kill bull markets.According to Ned Davis Research, which studies market returns and monetary policy, there have been 17 tightening cycles since 1946, with the S&P 500 rising an average of 5.3% over a 12-month period.The pace of tightening, however, made a marked difference: equity benchmarks fell by an average of 2.7 per cent during faster rate rises, while they rose by an average of 11 per cent during slower ones.While the Fed has often appeared to provide relief to investors in the past, the current market backdrop makes doing so challenging.Even allowing for its recent woes, the PRICE-earnings ratio for the S&P 500 peaked at more than 30.Although it has since shrunk to 24, it is still 20 per cent above its 10-year average.”Powell said the Fed’s focus has been on economic fundamentals, and the byproduct of that has been rising asset prices,” said Max Gottman, chief investment officer at Alpha TrAI.But now that inflation is here and real and the labor market is depressed, it’s time to focus on putting out the fire, and if that destroys the bulls, so be it.”It is true that the Fed did not take a surprise step that would certainly disrupt risky assets.Some investors had expected the central bank to be so focused on inflation that it would stop buying bonds at the meeting and possibly signal a 50 basis point rate rise in March.But that didn’t happen.Fears of tightening are weighing on the market, and traders are already finding it difficult to buy and sell stocks without having a big impact on prices.According to one measure tracked by JPMorgan, market liquidity has shrunk to its lowest level since the collapse triggered by the COVID-19 outbreak in March 2020.Anxious investors are flocking to the most liquid instruments in response to market turmoil.Trading volume in equity ETFs surged to record levels this week, according to data compiled by Bloomberg.”All data point to a significant deterioration in liquidity conditions this year,” Morgan Stanley strategists including Nicholas Panigittzoglou wrote in a note.”This poor liquidity situation raises the possibility of big swings in the stock market, but this does not necessarily mean capitulation.”————— Market Matrix: Futures & Derivatives Trading Research Center – Find your best trading opportunities from our selected stream of top news sources like Bloomberg/Reuters /CNBC/WSJ!+++ Top investment banks macro/stock index/crude oil/gold research report and strategy!+++ Economic data/industry report in-depth interpretation!+++ Follow ++ View all resources