Jerome Powell never fails to disrupt the markets
The Federal Open Market Committee quarterly update on Weds afternoon was supposed to be "baked in the cake". The FOMC previously announced that its zero rate policy would be continued for the foreseeable future ("several years" according to a prior Powell statement)--until the economy was fully recovered. This had been modified to say that even in the event that the economy ran "hot" (defined as inflation over 2%), the Fed Reserve was prepared to withhold rate increases. Easy money is magic elixir to the financial markets.
The FMOC meeting was held in the context of continuing high levels of COVID infections in the US and Globally, and slow return to work in the US during the summer months. Nevertheless, economic data had indicated a slow but steady improvement in the most recent quarter, with unemployment modestly declining but remaining at a high level relative to historic trends. Most investors, in my opinion, expect a continuation of those trends: modest economic improvement, but with the economy remaining well below normalized output levels pending distribution of an effective vaccine. I believe investors know that there is a risk of a "second wave" in the winter flu season which would entail some new economic disruption.
When the Fed Reserve announced its policy statement at 2pm, simply re-iterating the prior policy statements, the Dow immediately rallied about 70 points (presumably, there must be someone that is not paying attention).
The Statement indicated that:
"With inflation running persistently below this longer-run goal [of 2%], the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer term inflation expectations remain well anchored at 2 percent."
The real action began when the Chairman started speaking at 2:30p. As his usual practice, Chairman Powell was unable to simply articulate a coherent regurgitation of what everybody knew and expected. Rather he spooked the markets by implying that conditions had worsened and the economic outlook had become riskier. Furthermore, when pressed on the specifics of the general policy statement for added definition to words like "moderately" and "some time", he was unable to add anything of value. At one point, he insisted that the word "modestly" meant...well, "modestly" and "everyone knows what that means". The result, the market, measured by the DJIA, sank from up 270 to down by the time the presser ended.
Regrettably, Chairman Powell, a lawyer by training, is unable to perform a basic lawyering skill--forcefully advocating his own position. The next step is also well rehearsed at this point. Fed Reserve Presidents will walk back his remarks over the coming weeks. If past is prologue, even Chairman Powell himself will attempt to repair the damage he has done in his Congressional testimony next week.
Rumor is that Chairman Powell has regained the confidence of President Trump and is likely to be reappointed if there were a second Trump term. All I can say, is Please NO!!
