Powell’s Rate Hike, Lack of Concern About Financial Conditions Fuel Markets Rally: Analysis by Alf and AFR
On Wednesday, Federal Reserve Chairman Jerome Powell raised interest rates by 0.25 BPS, a move that was widely expected in the market. However, Powell’s following remarks, which showed a lack of concern about the ease of financial conditions, have caused markets to rally hard. Alf, the founder and CEO of TheMacroCompass.com, a macroeconomic insights platform, analyzes Powell’s decision and the market’s reaction.
According to Alf, Powell’s lack of pushback against easier financial conditions has extended the window for the “misplaced soft landing” narrative, where growth and inflation are declining but not yet to alarming levels. Alf notes that the first innings of a recession often look like a soft landing and Powell’s lack of pushback is adding fuel to the fire.
In his analysis of Powell’s comments on inflation and the labor market, Alf concludes that despite the progress on inflation, Powell did not sound the all-clear signal yet, and the bar for a proper Fed pivot remains high. Powell stated that the Fed still believes more rate increases are necessary and that he will have to wait for either very hot or recessionary data to come in before halting the markets’ rally. Alf notes that markets do not believe Powell and that he will have to do more to gain their trust.
The Australian Financial Review (AFR) also analyzed Powell’s decision and the market’s reaction. AFR notes that Powell was expected to talk the market out of its bullishness and emphasize the difficulties of getting inflation down with a rising share market. However, Powell downshifted the Fed’s tightening cycle, which was manna from heaven for markets that have rallied this year on the idea that the Fed’s tightening cycle is almost over.
Powell was asked about the recent easing of financial conditions, caused by the rally in the stock market and the fall in bond yields, and failed to sound hawkish. Instead, he suggested that the overall financial conditions were more important than short-term trends, a statement that was perceived as confusing by some. As a result, the S&P 500 increased by 1.5% between 2.35 pm and 2.55 pm, and the market closed up 1% on the day.
In conclusion, Alf’s analysis and the AFR’s observation show the importance of staying vigilant and informed about macroeconomic trends and events. TheMacroCompass.com provides unique insights, interactive tools, and portfolio strategy to help individuals make informed investment decisions.