Jerome Powell flipped the script

Federal Reserve Chairman Jerome Powell holds a press conference after a meeting of the Federal Open Market Committee of the Federal Reserve March 22, 2023 in Washington, DC.

Alex Wong | Getty Images News | Getty Images

This report is from today’s CNBC Daily Open, our new international markets newsletter. CNBC Daily Open brings investors up to date on everything they need to know, wherever they are. Do you like what you see? You can subscribe here.

The markets had expected the Fed’s increase in the quarter. Powell’s warnings about the economy surprised them.

  • Fed officials unanimously agreed to raise interest rates. But at the post-meeting press conference, Fed Chairman Jerome Powell admitted the committee was considering pausing hikes because “events in the banking system over the past two weeks are likely to result in tighter credit conditions.”
  • Asked by a senator whether the Treasury Department is considering guaranteeing all bank deposits without congressional approval, Treasury Secretary Janet Yellen said it is not.
  • PRO GameStop surged 35.24% on news that the company had its first profitable quarter in two years. But analysts are warning investors not to jump into the stock because it still faces long-term headwinds.

Recent meetings of the Federal Open Markets Committee have followed a pattern. The central bank would take a hawkish stance and raise interest rates aggressively, spooking the markets. Then Powell’s comments at the press conference would reassure investors, who would focus on his dovish remarks (probably unintentionally and to his annoyance, I would think).

This time, Powell flipped the script.

Markets had expected an increase of 25 basis points, and that’s what they got. Being right contributes to a sense of security, so all three major indexes actually rose after the Fed’s announcement. Indeed, Quincy Krosby, chief strategist at LPL Financial, noted that “markets are responding well to the expected 25 basis point rate hike.”

Then Powell began to speak. Initially, his assurances that “the banking system is healthy and resilient” continued to reassure markets. Then Powell started talking about “tighter credit conditions for households and businesses” which “could easily have a significant macroeconomic effect”. Worse, these conditions were not reflected in stock indices since they “do not necessarily capture the loan conditions.” This signaled that the economy could be in a worse place than many had thought, wrote CNBC’s Patti Domm.

As if trying to prove Powell wrong, the markets began to slide about an hour after Powell’s speech and were unable to stop their decline. By the end of the day, the Dow Jones Industrial Average lost 1.63%, the S&P 500 fell 1.65% and the Nasdaq Composite fell 1.6%.

They certainly weren’t helped by Treasury Secretary Janet Yellen’s clarification that, contrary to how markets took her Tuesday comments, the Federal Deposit Insurance Corporation was not considering “covering” bank deposits — as I warned in this newsletter yesterday.

The good news is that the Fed predicted it will raise interest rates just one more time — likely by another 25 basis points — before stopping. However, a cut is not on the table, if Powell is to be believed. Amid the ongoing banking crisis, coupled with the Fed’s warning about the broader economy, investors may be better off not fighting the Fed.

Subscribe here to have this report sent directly to your inbox every morning before the markets open.

Source link

Back to top button