The Markets’ Reaction To Powell
This Powell testimony reminds me of the Fed Minutes in that the markets’ reaction doesn’t make sense. There wasn’t much in the testimony which was hawkish, but the markets’ knee jerk interpretation was that it was hawkish. The market has been increasing the odds of 4 rate hikes this year. Therefore, the market just went with its initial fears regardless of what Powell said. Stocks fell modestly after the testimony which is reasonable because there has been such a big rally in the past few days. The S&P 500 has increased 1% six times in the past 2 weeks. It only increased 1% four times in 2017. Not only was 2017 quiet in terms of declines, it also didn’t have many big up days. It was a steady grind higher as if stocks suddenly became bonds. They offered a steady dose of capital gains each month. February looks like it will end the streak of winning months.
The knee jerk reaction to a hawkish Fed was normal. The dollar index rallied about a half of a percent and the treasuries sold off. The 10 year bond yield immediately increased about 6 basis points after the testimony. The CME Group website has the odds of a rate hike in March at 87.4% which is up from 78.9%. The chance of at least 4 rate hikes went from 24.4% to 33.9%. If I was Fed chair Powell, I would be slightly frustrated because he didn’t say anything that was different from the Minutes, yet the market construed it as hawkish. The main reason for this interpretation is likely the recent data as the regional Fed reports show prices paid have been very high. If these inflation reports stay consistent or move up, there will be 4 rate hikes. Personally, I think that’s a big “if” because inflation has been inconsistent.
Was Powell Even Hawkish?
Let’s look at a few of Powell’s quotes which support my point that he wasn’t hawkish. He mentions the recent dot plot which expects 3 hikes and then says, “Since then, what we’ve seen is incoming data that suggests a strengthening in the economy and continuing strength in the labor market. We’ve seen some data that in my case will add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe. And we’ve seen fiscal policy become more stimulative.” These are simply neutral facts. The government just passed a $400 billion spending bill and the recent data on inflation has heated up. He’s not saying anything about the Fed’s forecast. He’s simply relaying the data we already know.