Jerome Powell is sending mixed messages
From Scott Garliss at the Stansberry NewsWire:
Recently appointed Federal Reserve Chairman Jerome Powell has had a messaging problem. On several occasions since his appointment, the market has anticipated dovish commentary from Mr. Powell. They have received the opposite. The Fed announced last week that Mr. Powell would be speaking on the economy this coming Friday in Chicago.
The first instance of mixed messaging from Mr. Powell was February 27. It was during the Fed’s bi-annual Humphrey Hawkins testimony. This is an opportunity for the Fed to give Congress an update on the state of the U.S. economy and its financial welfare. The markets expected Mr. Powell to continue the gradual policies of his predecessor, Janet Yellen.
The text released before his presentation expressed Yellen-like rhetoric. It stated that the Fed was intent on maintaining a path of gradual rate hikes. Mr. Powell read the transcript sounding very much like Ms. Yellen before him. And then the question and answer session started.
Mr. Powell began to talk up inflation and the path of interest-rate hikes. He was optimistic on economic growth. He spoke of declining unemployment. He said he wouldn’t want to pre-judge the Fed’s new rate-path projections at the next meeting. The market interpreted this as an increasing path of rate hikes. The Dow Jones Industrial Average preceded to drop by 1.16% into the closing bell.
Mr. Powell had an opportunity to adjust the outlook two days later. The markets expected he would ease up on the hawkish tone from the prior speech. Instead, Mr. Powell said fiscal policy would add meaningfully to demand and put upward pressure on inflation. He commented that he doesn’t want to see the Fed get behind the curve on rate hikes. Again, the market took his comments as hawkish and the Dow dropped by another 1.7%.
Then, on March 21, Mr. Powell conducted his first meeting as Fed chair. Everything was going well. The policy statement was released and the Dow rallied 0.5%. That was until he spoke…
Mr. Powell again talked up economic growth and inflation while talking down unemployment. He mentioned that raising rates too slowly would raise the risks of tightening too quickly down the road. That would in turn stifle economic growth. From the highs after the policy release until the end of the day, the Dow lost 1.2%.
Mr. Powell speaks this Friday. One can only imagine the outcome… Based on recent commentary, it would be reasonable to expect a negative market reaction. If Mr. Powell is once again hawkish on rates, the short camp will press their case. They will hone in on rising inflation and the negative potential for the market and the economy.
The markets will be all ears come Friday.
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