Federal Reserve President Jerome Powell speaks to reporters after the Federal Reserve cut interest rates in an emergency move designed to protect the world’s largest economy from the impact of the coronavirus during a press conference in Washington, 3 March 2020.
Kevin Lamarque | Reuters
Fed Chairman Jerome Powell calmed the markets on Wednesday and resisted speculation that the central bank could begin to slow its easy policies.
The Federal Reserve on Wednesday strongly boosted its outlook for economic growth, but indicated that it still does not expect interest rate hikes until 2023. It also expects higher inflation this year, but only temporarily.
Speaking to the press, Powell reinforced the message that the Fed will not move away from zero interest rates or bond purchases anytime soon. His comments dispelled the concerns of market professionals that the central bank would soon discuss the outcome of some of its easing programs.
The futures market has also started to price interest rate hikes from 2023 onwards.
“I thought this was one of the best press conferences we’ve seen from Powell,” said Jim Caron, head of global macro strategy at Morgan Stanley Investment Management.
“He got there and kind of shook his head, and said, ‘This is what we’re doing. This is what is happening. I said patient and I meant it, ‘”said Caron. “Wow, mission accomplished.”
Stocks soared after Powell’s comments
Caron said that “the reflection trade is intact” and Powell avoided part of the market reaction that occurred during previous comments.
“The last time he spoke, 10-year earnings were starting to rise to 1.50%,” said Caron. “Everyone expected him to speak softly, and he didn’t.”
Caron added that the option price indicated that investors hoped that the central bank meeting and Powell’s press conference could have resulted in one of the Fed’s most volatile events in months.
But the markets were relatively calm.
Treasury yields have gone out of their day highs and stocks have soared. Nasdaq Composite reversed its losses, ending at 0.4%. The Dow Jones Industrial Average closed above 33,000 for the first time, ending the day at a record 33,015, a gain of 0.6%.
“What I am saying is the monetary policy stance we have today, which we consider appropriate,” Powell said during his afternoon news conference.
While there was speculation that the Fed would signal that it might be prepared to discuss reducing bond purchases, Powell said that this would not happen until economic data showed “substantial progress”.
A perspective of improvement and without reduction
Bond yields increased with improved economic prospects, the anticipated boost to the $ 1.9 trillion fiscal stimulus package, as well as concerns that inflation might heat up.
The 10-year yield has risen in the past six weeks from about 1.07% to an increase of 1.68% on Tuesday. Yield, which moves contrary to the price, was 1.64% at the end of the day.
Gross domestic product is expected to increase 6.5% in 2021, before decelerating in later years, according to updated projections by members of the Federal Open Market Committee.
The biggest thing that Powell said is that the Fed does not fear the bogeyman of inflation.
Michael Arone
chief investment strategist at State Street Global Advisors
“I think the market was looking at this in some directions, just trying to understand how far the Fed would update its outlook, based on an additional $ 2 trillion stimulus,” said James McCann, senior economist at Aberdeen Standard Investments. “What the Fed did not do was blink.”
The pressure was on entering the meeting. Goldman Sachs economists said in a statement that the meeting would be “one of the most critical events for the Fed in some time”.
Powell reiterated that the Fed is not ready to decline.
“Until we give a signal, you can assume we’re not there yet,” he said. “As we approach this, well in advance, we will give a signal that yes, we are on the way to possibly achieve this, to consider the reduction.”
Walking the fine line
Greg Faranello, head of US rates at Amerivet Securities, said Powell managed to walk the fine line during his briefing.
He said the market behaved as if it were in line with Powell’s opinion. The 10-year Treasury’s yield fell, and the yield curve – or the difference between rates across various maturities – flattened, Faranello said.
“He himself is a conductor. It is because of what he managed to say … ‘We want higher inflation. We want more growth … we want all of these things and we also want low rates,” “said Faranello. “Without doing anything – think about it – he did it.”
Michael Arone, chief investment strategist at State Street Global Advisors, said the Fed’s message about inflation not being a problem helped to reverse the Nasdaq.
“The biggest thing that Powell said is that the Fed does not fear the bogeyman of inflation,” said Arone.
“He described inflation this year as ‘transitory’, not transitory, as everyone is saying. And then he sees it falling,” added Arone. “As a result, we are seeing rates drop and Nasdaq soar.”