Stock investors don’t believe Powell because the Fed lost most of its credibility in recent years by promising it could do quantitative tightening on autopilot in its long-awaited and feared balance-sheet unwind, which crashed stocks back in 2018.
Next it slammed the brakes on QT in a Fed faceplant because it had also crushed bank reserves, which the Fed, more than any entity on the earth, is supposed to understand and manage. After causing the Repo Crisis, the Fed exited that misstep by overprinting money in the wildest cash spree in history, in the hysterical fantasy that massive money printing (under the new pop philosophy of Modern Monetary Theory) would not cause inflation, which it immediately caused … eventually on a large scale that it has found hard to stop.
It got to that point because the Fed denied inflation was significant when it was obvious that inflation was rising behind the scenes into a boundless inferno. Under its misinformed and clearly misspoken belief that inflation would prove all on its own to be “transitory,” the Fed waited too long to tighten after printing way too much money in the face of the worst shortages seen since WWII, and we all know scarcity, by itself, drives up prices. That’s why diamonds are worth more than glass and gold worth more than tin.
Now, this week, Powell talked out of both sides of his face in that his written speech sounded hawkish as did some of his initial words in each answer during the Q&A, BUT every answer seemed to conclude with a follow-up comment that went something like, “Of course inflation could come down faster than we expect; in which, case we’ll be able to back off from fighting it so hard because we are making good progress.”
Like an out-of-touch parent who doesn’t know sugar makes kids more active, Powell offered this kind of candy more than a couple dozen times as if he really didn’t realize the long-delusional stock market would seize solely upon every morsel that sounded sweet and ignore all the bitter Brussel sprouts in his packet of goodies and medicine.
If Powell’s aim ever was to tighten financial conditions, he either failed miserably at his last presser, or the plan has suddenly taken an important turn, because immediately financial conditions loosened all the way back to the pre-inflation days of massive money printing. Interest rates fell as bonds repriced, and stocks surged as expectations for easier times soared in the lunatic asylum on Wall Street. (Later in the week interest rates bounced back up.)
Welcome to our barmy and brainless new world
This note of optimism throughout the Powell presser created a sense that the Fed’s plan was based on a worst-case-scenario so that anything that happened outside of the Fed’s expectations would likely be for the better, even though everything Powell said the Fed would actually do was exactly what he’s led the world to believe for a few months now. All it took was a breath of etherium for markets to rise higher than a Chinese helium balloon.
Wolf Richter put together a good summary of just how hawkish Powells’ words were, but Powell surely had to know that if he left little hanging bits of hope in front of the children, they would grasp for the treats and use them as an excuse to go berserk, which, of course, they predictably did.
“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done,” but it’s not done, Powell said.
However, the market heard none of that. You can read Wolf’s list of the Fed’s tough talk to see all the hawkish statements the Fed made, and Powell made a lot. I won’t reiterate any of it here because none of it mattered. Powell repeated many times what everyone already knew about how the Fed would tighten a little more and then stay tight for the full year, but the market only hit on his hopium.
The question is what happens next? If Powell misspoke and was surprised to see he undid some of the tightening of financial conditions, will he use Tuesday’s talk to bring it all back down? Will it even matter if he does since the market is still smoking delirium handed out at the last Fed meeting?
Perhaps Powell felt he had pounded the points of tightening so hard that he had better back off a little, lest he cause economic wreckage from saying it so many times. If so, it appears he miscalculated badly. He should have known this market only wants its next high, no matter how insane that is in the present falling world.
Powell, in the very least, pretended he cared about keeping financial conditions tight, which since October have done this:
Higher asset prices inevitably mean looser financial conditions. Powell said this mattered:
The minutes of the December meeting mentioned this “unwarranted easing of financial conditions,” and pointed it out as a risk that would make it more difficult for the Fed to bring inflation down. Powell was asked a couple of times about that….
“Financial conditions have tightened significantly over the last year,” he said. “The financial conditions haven’t changed much from the December meeting [Dec 14] until now.”
Well, the latter statement was a bit out of touch, given the graph above shows they certainly changed a lot.
It is important that the markets do reflect the tightening that we are putting in place as we have discussed a couple of times here. There is a difference in perspective by some market measures on how fast inflation will come down. We will have to see.
I mean I am not going to try to persuade people. I have a different forecast. Our forecast is that it will take some time and patience, and we will need to keep rates higher for longer.
And there is where he went off the rails. If he wants to keep conditions tightening, instead of easing back down, he should have cared about trying to persuade people because financial conditions became looser still in response to his talk.
Of course, many things affect financial conditions, not just our policy. We will take into account overall financial conditions along with many other factors as we set policy.
We think we covered a lot of ground, and financial conditions have certainly tightened. I would say we still think there is work to do there.
Keep talking like that to this market, and you’ll have a lot more to do.
Powell talked about the metrics the Fed actually pays most attention to, which he said haven’t budged at all — zero progress he indicated. The market didn’t care what he said about that. It only heard Powell say the Fed might be wrong, and, if so, it could back off a little. The market has seen the Fed do that so many times with all the other Fed mistakes that investors seemed to take it as the given they want to believe in.
This is not a market you can talk to rationally. The problem is, the more the market rises on fantasies, the harder it will have to fall with greater momentum when it finally realizes tightening really is going to last through the year and that the market’s rise only means the Fed, at some point, is likely to have to tighten even harder. If Powell is smart, he’ll smack the market down hard right now; but it’s highly debatable he’s smart about that particular thing.
Of course, I have people tell me I’m delusional to think this bear market isn’t dead with a new bull already being born. Well, I guess, as Powell said, “We will have to see.”
As Wolf Richter commented toward the end of his article,
What was hilarious at the press conference today was a slew of crybaby can’t-you-stop-the-rate-hikes questions. They were so funny that we’ll go through some of them here, and you’ll see that Powell should have answered them with: “Stupid question. Next!” Or “I already shot this down twice. Next!”
But that’s just it. That is the thinking prevalent throughout financial media, so it is prevalent throughout the stock market — this idea that we’ve done enough now, so we can take a break. Powell encourages this kind of thinking because, I think, he is a gentle person by nature, so he tries to give nice answers; but what you really need to do to people who are living in a state of mania is slap them hard in the face. Powell tried to answer them all politely, and that had no wake-up quality.
The giddy market merely giggled in Powell’s face, conditioned by years of the Fed fading on toughness and caving into the craven market’s wishes, oblivious now to the fact that there was no inflation then to stiffen his spine like a plank as he has now.
That does, of course, mean the Fed’s policy approach of forward guidance is no longer working due to loss of credibility or loss of fear of the Fed … or both. The market is playing chicken with the Fed. However, investors need to realize that the Fed no longer wants to save the market. It doesn’t care if the market falls hard this time. In fact, it is hoping the market falls, as that is a major part of the financial conditions that Powell said do matter.
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