Federal Reserve Chairman Jerome Powell told reporters after the Federal Reserve cut interest rates in an emergency to protect the world’s largest economy from the impact of the coronavirus during a news conference in Washington on March 3, 2020.
Kevin Lamarque | Reuters
Fed Chairman Jerome Powell calmed markets on Wednesday and pushed back against speculation that the central bank could start canceling its lightweight policies.
The Federal Reserve on Wednesday sharply intensified its outlook for economic growth, but indicated that it does not yet see rate hikes until 2023. It also expects higher inflation this year, but only temporarily.
Speaking to the media, Powell reinforced the message that the Fed will not move away from zero interest rates or its bond purchases soon. His comments disappointed marketers with concerns that the central bank will soon discuss some of its relaxation programs.
The futures market has also started to appreciate interest rate hikes since 2023.
“I thought this was one of the best press conferences I’ve seen at Powell,” said Jim Caron, head of global macro strategy at Morgan Stanley Investment Management.
“He got up there and shook him a little and said, ‘That’s what we do. That happens. I said patient and I wanted to say, “Caron said.” Wow, mission accomplished. “
Stocks rose after Powell’s comments
Caron said “the trade in inflation is intact,” and Powell avoided some of the market reaction that took place during previous comments.
“The last time he spoke, 10-year yields were starting to rise to 1.50%,” Caron said. “Everyone expected him to speak down and he didn’t.”
Caron added that option prices indicated that investors expected the central bank meeting and Powell’s press briefing to have resulted in one of the Fed’s most volatile events in recent months.
But the markets were relatively quiet.
Treasury yields fell from the high of the day, and stocks rose. Nasdaq Composite reversed its losses, reaching 0.4%. The Dow Jones industrial average closed above 33,000 for the first time, ending the day with a record of 33,015, a gain of 0.6%.
“What I’m telling you is the monetary policy position we have today, we think it’s appropriate,” Powell said at his afternoon press conference.
Although it has been speculated that the Fed may signal that it may be ready to discuss a return to its bond purchases, Powell said this will not happen until economic data makes “substantial progress.”
An improved perspective without discounts
Bond yields have shifted further in terms of the improved economic outlook, the anticipated increase in the $ 1.9 trillion fiscal stimulus package, and concerns that inflation could heat up.
The 10-year yield has risen in the past six weeks from about 1.07% to a high of 1.68% earlier on Tuesday. The yield, which moves at the opposite price, was 1.64% late in the day.
Gross domestic product is expected to grow by 6.5% in 2021 before slowing in the coming years, according to updated forecasts by members of the Federal Open Market Committee.
The biggest thing Powell said is that the Fed is not afraid of the inflation boogeyman.
Michael Arone
chief investment strategist at State Street Global Advisors
“I think the market is looking at it for a few directions, just trying to understand the extent to which the Fed will update its view, based on an additional $ 2 trillion stimulus,” said James McCann, senior economist at Aberdeen Standard Investments. . “What the Fed didn’t do is not blink.”
The pressure was beginning to enter the meeting. Goldman Sachs economists said in a note that the meeting would be “one of the most critical events for the Fed for some time.”
Powell reiterated that the Fed is not ready to shrink.
“Until we give a signal, you can assume we’re not there yet,” he said. “As we approach it, well in advance, well in advance, we will signal that yes, we are on track to achieve this, to consider the reduction.”
Walking on a fine line
Greg Faranello, head of US tariffs at Amerivet Securities, said Powell managed to get on the fine line during his session.
He said the market behaved as if it were Powell’s opinion. The 10-year treasury yield has declined, and the yield curve – or the difference in rates at different maturities – has flattened, Faranello said.
“He himself is a master. He is because of what he managed to say …” we want higher inflation. We want more growth … we want all these things and we want low rates, “Faranello said.” Without doing anything – think about it – he understood. “
Michael Arone, chief investment strategist at State Street Global Advisors, said the Fed’s message about inflation is not an issue that helped transform the Nasdaq.
“The biggest thing Powell said is that the Fed is not afraid of the inflation boogeyman,” Arone said.
“He described this year’s inflation as ‘transient,’ not transient, as everyone says. And then he sees it go down,” Arone added. “As a result, you see rates falling and the Nasdaq rising.”