Jerome Powell, the wet blanket, strikes again.
This time, though, investors seemed to really be looking for a reason to sell after being up in many stocks and ETFs by more than 30% in the last three months. When comparing that to the low savings rates of today thanks to the Fed’s ongoing near zero interest rate policy, it would have taken about 30 years to make those kinds of gains in a savings account.
So what gives? Why did the market sell even as Powell signaled no changes to rate hikes and Fed support for the securities markets?
The Fed’s dour Summary of Economic Projections, issued alongside the FOMC’s statement yesterday is what sent stocks lower.
“It helped sap some money demand at the margin,” says Vladimir Signorelli, head of macro research firm Bretton Woods Research. Powell pulled the 10-year yield down 74 bips from 77 bips, a decent move in Treasury markets.
The Fed is projecting GDP to contract by 6.5% this year versus the 2% growth projected back in December 2019, otherwise known as “the good ole days.”
Unemployment is projected to end the year at 9%, versus around 3% back in December but consistent with St. Louis Fed President Jim Bullard’s call for unemployment falling below 10% under a "V-shaped recovery."
The OECD said on Wednesday that the U.S. would see unemployment of around 10% by year’s end in their revised global growth forecast.
One of other curious and potential troubling developments for the market was Powell’s admission that the FOMC has been studying yield curve control. The practice has been taken up by the Bank of Japan since 2016.
Before the corona virus outbreak, Fed governors Richard Clarida and Lael Brainard raised curve control as a potential model, and John C. Williams has talked seriously about implementing some form of yield curve control this year.
“YCC is simply another variation of top-down price manipulation similar to the disaster of interest-rate targeting. We don’t like it,” says Signorelli.
Maybe the market was telling the Fed that they don’t like it either.
The gold price rose on the news.
One of the bright spots of Powell’s Q&A session was his avowedly pro-labor stance — all suggesting that if there is a real V-shaped recovery and labor markets recover, he is not going to raise interest rates because he doubts it will be inflationary enough to do so.
“Lower for longer that is where the Fed stands for now,” says Naeem Aslam, chief market strategist for AvaTrade. “Basically, the Fed is determined to maintain adequate liquidity in the system and they are ready to do whatever is required from them. The bottom line is that the market needed a hug from the Fed and they got it.”
This article originally appeared on Forbes.
