A day after Powell’s confirmation, markets are worried that something is going to happen

Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve raised its target interest rate by three-quarters of a percentage point to stem the turbulent rise in inflation, during a press conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, US June 15, 2022.

Elisabeth Frantz | Reuters

Chairman of the Federal Reserve Jerome PowellThe central bank’s insistence that the central bank is not intentionally trying to cause a recession and that the economy is on a solid footing is exactly what someone in their position would expect them to say.

The problem is that the Fed is likely to get into a recession anyway as data shows that the economy is far from stable.

Subsequently, Markets fell on Thursdaymoving from Wednesday’s positive reaction to Powell’s post-meeting comments to a state of defeat as concerns grow about the impact of higher interest rates and monetary policy tightening on the fragile situation.

“What is worrying the market, even before it hits a recession, is a policy error, that the Fed is breaking something,” said Quincy Crosby, chief equity strategist at LPL Financial. “The market is also skeptical about his comment that the economy is strong.”

More specifically, there are two comments made by the Federal Reserve chief notable from the press conference: First, the Fed is not trying to “create a recession now. Let’s be clear about that.” Also: “There is no sign of a broader slowdown that I can see in the economy.”

In fact, there are countless signs of slowing down.

Real estate data for May showed on Thursday alone 14.4% monthly slowdown in housing construction At a time when there is a chronic shortage of housing. The manufacturing reading from the Federal Reserve showed Deflation continues in the Philadelphia region. Weekly unemployment claims It was higher than expected like that.

This data accumulates on other recent points: Inflation is at its highest level in 41 yearsconsumer confidence is at historic lows, and Reduced retail spending In the midst of a huge price hike.

“At least, growth was slowing even before the Fed started to put the brakes on,” said Tom Purcelli, chief US economist at RBC Capital Markets. “The evidence for that is apparently growing on a consistent basis now… with all due respect to [Powell’s] Comment, that is not consistent with the data on Earth.”

problem solving

Following Wednesday’s decision Raising benchmark interest rates by 75 basis pointsIt’s the biggest move in 28 years, and Wall Street’s reactions to the rally, as well as Powell’s comments, gathered around some common themes.

First, Crosby said, “the market believes the Fed will erase inflationary pressures.”

However, “that’s the problem now. There is a feeling in the market that it could lead us directly towards the Fed breaking something, which is a mistake in policy,” she added.

Second, there was a general lack of clarity about what would happen next. Will the Fed raise 50 basis points or 75 basis points in July? Powell’s comments indicated that both were on the table, but his half-glass comments about the economy left more room for maneuver than the markets were comfortable with.

Finally, the president contradicted himself on multiple occasions.

He noted that the Fed has little control over inputs to inflation such as energy and food prices, but said the Fed will keep rising until gas prices fall. He also said that inflation expectations are well anchored while acknowledging that the pivot to policy away from rising by half a percentage point to Wednesday’s move has been influenced by rising inflation expectations, as shown in Friday’s University of Michigan survey.

Then there was the economic question, with the president insisting the economy is well-positioned to handle higher rates while the Atlanta Fed gauge showed flat economic growth in the second quarter after declining 1.5% in the first.

Fed chief ‘confused’

Combined, Powell’s comments “appear to be muddled, lack confidence and increase macroeconomic and financial stability risks,” Bespoke Investment Group said in a note to clients.

The company also held Powell responsible for stressing food and fuel inflation, which is generally outside the Fed’s jurisdiction.

Not only is the Fed explicitly targeting the wrong variable and throwing forward guidance aside, it also appears to be very optimistic about near-term growth; Powell described consumer spending as “strong” amid “the lack of sign of a broader slowdown in the economy adding to the Our concern is that the Fed is behind the curve and heading for a policy error as a result,” Bespoke said.

Powell emphasized that he and his fellow policymakers would not be confined to a specific course of action but would be guided by data.

He may not like what he’s seeing for a while, especially if he’s focused on major inflation effects like gas and groceries.

These numbers will likely point to annual increases of 9% for the rest of the summer, RBC’s Purcelli said, putting the Fed in a potential fund if it uses these levels as policy catalysts.

“They need a ramp,” Borselli said. “They need to acknowledge the fact that they can’t control these things.” “They need a better narrative. Except for him to strategize more coherently for how they’re going to deal with this, that gives way to the idea that they might be making a more significant political mistake.”