Chairman Powell Changes the Game With Just a Few Words

(The Street) - With a few words in congressional testimony, Federal Reserve Chairman Jerome Powell has changed the game for investors and traders. It wasn't much, and frankly nothing he said was unexpected. But it was somewhat refreshing to see him finally come around to acknowledge inflation is a problem. That whole schtick about "transitory" was exhausting. Indeed, he stated last Tuesday that it might be time to retire that word from use. Whew, thank you, Chairman Powell!

With the Fed now said to be laser focused on fighting inflation (something it has done so well for 43 years and counting), we need to assess the landscape. Is a less dovish Fed good for stocks? At this point in the cycle, the answer is no. But with rates so low and having been so for such a long period of time, will two or three rate hikes really matter?

That's a good question, and all we need to do is look at recent history for the answer. When Janet Yellen was the Fed's chairwoman she raised interest rates in 2015 for the first time in nine years. That led to a few more rate hikes until Chairman Powell cut rates to zero in March 2020. That first move led to some panic selling; markets dropped about 10% over the next few months but eventually battled back.

But we're not looking for rate hikes just yet. It's the tapering and lack of liquidity that is the issue here, and the market is not feeling good about it. Volatility has risen sharply since Thanksgiving week, spurred on by uncertainty surrounding a new COVID variant. But with markets up strong in 2021, it is never a bad thought to consider ringing the register. And if the Fed pushes us to that action, then all the better.

How might the landscape be changing? A hawkish Fed requires more discipline and careful analysis. No longer will a soft Fed policy bail you out of a mistake or poor market condition. Play it tight, keep your cards close to the vest and look for opportunities. Just keep them with a tight leash.

Mon, December 6, 2021


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