Jerome Powell has been very consistent with his message for the past year or so. He wants unemployment to rise, he wants inflation back to 2%, and he’s not going to allow a bear market in equities to stop him from keeping monetary policy tight as a means to achieving those ends.
Powell made it clear today that he has no intention of cutting interest rates any time in 2023. But with credit conditions certain to tighten in light of recent banking sector instability and ‘high’ interest rates, a recession may soon be upon us.
Now, due to the hyper-financialization of our economy, it seems to me the only way we get a loosening of monetary policy is with a stock market making much lower lows — whether or not we get an ‘official’ recession.
One way or another, something has to give.
As I mentioned in my March 15 post, the Fed was expected to raise its interest rate target by 25 basis points today, and Powell delivered just that. The Fed Funds target is now 4.75-5.00%. Powell suggested a wait-and-see approach to further rate hikes but also sounded determined to keep rates at or above current levels into 2024.
So while the 25 bps was expected, the market had been pricing in rate cuts to begin much sooner than ‘into 2024’. I suspect that is a big reason for today’s sell-off in stocks.
In fact, given the recent concerns within the banking sector, some had expected the Fed to pause or even ‘pivot’ today, however the hot inflation and economic data that continue to pour in is keeping the Fed pinned to a hawkish stance — for now anyway.
Here’s how the day went down:
As reported by the National Association of Realtors this morning, existing-home sales surged in February, reversing a 12-month slide and registering the largest monthly percentage increase since July 2020. Single-family home sales soared to a seasonally adjusted annual rate of 4.14 million in February, up 15.3% from 3.59 million in January.
Working our way backward in time, the above followed a rather strong inflation print on March 14, and a March 10 jobs report that came in hotter than expected — both of which gave credence to a hawkish Powell ‘putting a 50 bps rate hike back on the table’ on March 7.
Had it not been for the recent banking concerns, we may very well have seen that 50 bps move today.
At 2:00 PM ET, the FOMC announced its quarter-point rate hike and published a statement that included the following:
“The Committee will closely monitor incoming information and assess the implications for monetary policy,” the FOMC’s post-meeting statement said. “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.“
“The U.S. banking system is sound and resilient,” the committee said. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”
— FOMC, March 22, 2023
In the 30 minutes that followed, I was not sure how to interpret the above. But when Powell started speaking at 2:30 PM he was quite clear. He spent the first 60 seconds of his speech reassuring his audience that the recent banking failures were under control and that the banking system was sound.
Powell then immediately went back to his hawkish tone regarding the need to bring down inflation to the FOMC 2% target while noting that labor conditions remained too tight (read ‘unemployment too low’).
The Fed chairman then outlined the Committee’s view of the fed funds target rate going forward:
5.1% at end of 2023
4.3% at end of 2024
3.1% at end of 2025
In reaction to the above, risk assets screamed higher momentarily in today’s afternoon session with stocks, bonds and precious metals all rallying with the US dollar down hard — until 2:45 PM, that is.
In the end, equities ended the day down decidedly lower, particularly when you figure the total swing from top to bottom during the last 75 minutes of trading.
Both gold and US treasuries served as ‘safe havens’ rallying quite nicely into the finish.
Let’s take a look at what today’s Fed speak and market action means for investors.
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