Jerome Powell flipped the script

Federal Reserve Board Chairman Jerome Powell holds a news conference following the Federal Reserve’s Federal Open Market Committee meeting on March 22, 2023 in Washington, DC.

Alex Wong | Getty Images News | Good pictures

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Markets expected a quarter point hike by the central bank. Powell’s warnings about the economy impressed them.

  • Fed officials unanimously agreed to raise rates. But in a post-meeting press conference, Fed Chair Jerome Powell acknowledged that the committee considered pausing hikes because “events in the banking system over the past two weeks could result in tight credit conditions.”
  • Asked by a senator whether the Treasury is considering guaranteeing all bank deposits without congressional approval, Treasury Secretary Janet Yellen said.
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The last few Federal Open Market Committee meetings have followed a pattern. The central bank takes a dovish stance and raises rates aggressively, threatening the markets. Powell’s comments at the press conference will calm investors, who will focus on his bad comments (perhaps accidentally and to his chagrin, I imagine).

This time, Powell flipped the script.

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

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Then Powell began to speak. At first, his assurances that the “banking system is sound and sound” kept the markets going. Then Powell began talking about “tight credit conditions for households and businesses” that “could easily have a significant macroeconomic effect.” Worse, these conditions are not reflected in the stock indexes because they “do not necessarily capture lending conditions.” That suggests the economy may be in a worse place than many thought, wrote CNBC’s Buddy Dome.

As if trying to prove Powell wrong, the markets began to slide 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 the Federal Deposit Insurance Corporation is not considering “blanket insurance” for bank deposits, contrary to her comments on Tuesday — which I warned about in this newsletter yesterday.

The good news is that the Fed predicts it will raise interest rates just one more time — perhaps by another 25 basis points — before pausing. If Powell is to be believed, a cut is not on the table. Amid the current banking turmoil, with the central bank cautious about the broader economy, investors are better off not fighting the central bank.

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