March 7, 2023
We heard from Jerome Powell today, at his semiannual Congressional testimony.
He released his prepared remarks, stocks went lower.
Before we get into what he said, let's talk about where he left off.
The last Fed meeting was about five weeks ago. Remember, this is the meeting where he talked over and over again about the disinflation in the economy (falling inflation). He said they had "covered a lot of ground." And he said "real rates are positive," after telling us for the past year that "we'll want to reach positive real rates."
From this meeting last month, he left good cues that the Fed was backing off its strategy of lobbing threats at markets and the economy. As for rates, they also built in expectations that they would continue on, and go above 5%.
Let's step back and take a look at how markets have responded to that meeting, which was largely thought to be market friendly.
The major U.S. index futures have traded in a 7%-9% range (a bit more volatile than average), but as of this morning, were (relatively) little changed compared to the morning of the February 1st Fed meeting.
The benchmark 10-year yield, on the other hand, has gone from 3.5% (prior to the meeting) to 4% – a huge move.
So, what did he say today?
He started by saying "we've covered a lot of ground."
And he said the full effects of the actions they've already taken are "yet to be felt."
He countered this with acknowledgement that January data was hotter, though it could be attributed to "unseasonably warm weather."
And he warned that the stopping point for rates in this tightening campaign, is (now) likely to be higher, given the recent data. And they will move faster if warranted.
"Higher" and "faster" were likely the keywords that triggered the algorithmic traders (i.e. if "______", then "sell").
Stocks finished down 1.5%.
What about yields? Little changed!
What's the takeaway?
The Fed has already built in expectations of a terminal rate in the low 5% area. Today, it gets moved up a bit, IF the data continues to show a bounce back in price pressures.
Importantly, the open ended threats on where rates can go, on destroying jobs, and on tightening financial conditions (i.e. talking down stocks), are no longer present. The use of that very effective tool of the past year (the verbal manipulation by the Fed) seems to be over.
That's good news for the economy and for markets.
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