Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve cut interest rates on an emergency measure designed to protect the world’s largest economy from the impact of the coronavirus, during a press conference in Washington, March 3, 2020.
Kevin Lamarque | Reuters
Fed Chairman Jerome Powell calmed markets on Wednesday and backtracked on speculation that the central bank could begin to end its easy policies.
On Wednesday, the Federal Reserve sharply boosted its outlook for economic growth, but indicated that it still does not see interest rate hikes until 2023. It also expects higher inflation this year, but only temporarily.
In statements to the press, Powell reinforced the message that the Fed will not move away from zero interest rates or its bond purchases any time soon. His comments dampened the concerns of market professionals that the central bank would soon discuss the possibility of developing some of its relaxation programs.
The futures market had also started trading in interest rate hikes from 2023 onwards.
“I thought this was one of the best press conferences we’ve seen of Powell,” said Jim Caron, head of global macro strategy at Morgan Stanley Investment Management.
“He stood up there and moved it and said,‘ That’s what we’re doing. This is what is happening. I said patient and I meant it, “Caron said.” Wow, mission accomplished. “
Stocks rose after Powell’s comments
Caron said the “reflation trade is intact” and Powell avoided some market reactions that occurred during previous comments.
“The last time he spoke ten-year yields were starting to go up to 1.50%,” Caron said. “Everyone expected him to talk about things and he didn’t.”
Caron added that the price of the options indicated that investors hoped the central bank meeting and Powell’s press session could lead to one of the Fed’s most volatile events in recent months.
But the markets were relatively quiet.
Treasury yields fell from daily highs and stocks rose. The Nasdaq Composite reversed its losses and finished 0.4%. The Dow Jones Industrial Average closed above 33,000 for the first time and ended the day with a record 33,015, a gain of 0.6%.
“What I’m telling you is the monetary policy stance we have today, we think it’s appropriate,” Powell said during his afternoon press conference.
While it has been speculated that the Fed would indicate it might be prepared to discuss the return of bond purchases, Powell said that would not happen until economic data makes “substantial progress.”
An improving perspective without reduction
Bond yields have risen in relation to the improved economic outlook, the projected increase in the $ 1.9 trillion fiscal stimulus package and concerns about the possibility of warming inflation.
Ten-year yields have risen in the past six weeks, from 1.07% to a high of 1.68% on the previous Tuesday. The yield, which moves against the price, stood at 1.64% at the end of the day.
Gross domestic product is expected to increase 6.5% in 2021 before slowing in later years, according to updated projections from members of the Federal Open Market Committee.
The most important thing Powell has said is that the Fed is not afraid of inflation.
Michael Arone
chief investment strategist at State Street Global Advisors
“I think the market was looking at it in some directions, just trying to understand how far the Fed would improve its view, based on an additional $ 2 trillion stimulus,” said James McCann, senior economist at Aberdeen Standard Investments. “What the Fed has not done is not blink.”
Pressure was coming into the meeting. Goldman Sachs economists said in a note that the meeting would be “one of the most critical events for the Fed in a while.”
Powell reiterated that the Fed is not prepared to shrink.
“Until we give any signal, you can assume we’re not there yet,” he said. “As we approach it, well in advance, well in advance, we will signal that yes, we are on a path to achieve this possibly, to consider volume reduction.”
Walking a thin line
Greg Faranello, head of U.S. rates at Amerivet Securities, said Powell managed to draw a fine line during his briefing.
He said the market was behaving as if it were in Powell’s sight. The ten-year Treasury yield fell and the yield curve, or the difference between maturity rates, flattened, Faranello said.
“He himself is a teacher. That’s what he has managed to say …” we want higher inflation. We want higher growth … we want all these things and we also want low rates, “Faranello said.” Without doing anything, think about it, he got it. “
Michael Arone, chief investment strategist at State Street Global Advisors, said the Fed’s message that inflation was not an issue helped turn the Nasdaq upside down.
“The most important thing Powell has said is that the Fed is not afraid of inflation,” Arone said.
“He described inflation this year as ‘transient’ and non-transitory, as everyone says. And then he sees it fall,” Arone added. “As a result, you see rates falling and the Nasdaq soaring.”