The last few Federal Open Markets Committee meetings have followed a pattern. The central bank would take a hawkish stance and hike rates aggressively, spooking markets. Then Powell's comments at the press conference would soothe investors, who'd focus on his dovish remarks (probably unintentional and to his chagrin, I'd imagine).
This time, Powell flipped the script.
Markets had expected a hike of 25 basis points, and that's what they got. Being right contributes to a sense of certainty, so all three major indexes actually rose after the Fed's announcement. Indeed, Quincy Krosby, chief global strategist of LPL Financial, noted "markets are responding well to the expected 25 basis points rate hike."
Then Powell started speaking. At first, his reassurances that the "banking system is sound and resilient" continued soothing markets. Then Powell started talking about "tighter credit conditions for households and businesses" that could "easily have a significant macroeconomic effect." Worse, these conditions were not reflected in stock indexes since they "don't necessarily capture lending conditions." This signaled that the economy could be in a worse place than many had thought, wrote CNBC's Patti Domm.
As if trying to prove Powell wrong, markets began sliding about an hour after Powell's speech and couldn't arrest their decline. By the end of the day, the Dow Jones Industrial Average lost 1.63%, the S&P 500 fell 1.65% and the Nasdaq Composite sank 1.6%.
They were certainly not helped by Treasury Secretary Janet Yellen's clarification that, contrary to how markets took her Tuesday comments, the Federal Deposit Insurance Corporation was not considering "blanket insurance" for banking deposits — as I'd warned in this newsletter yesterday.
The good news is that the Fed forecast it'll hike interest rates only one more time — probably by another 25 basis points — before pausing. A cut, however, is not on the table, if Powell is to be believed. Amid the ongoing banking turmoil, coupled with the Fed's warning about the broader economy, it might be better for investors not to fight the Fed.
