U.S. stocks and bonds rallied on Wednesday, much to the chagrin of traders who had ramped up bearish bets on the expectation that Federal Reserve Chairman Jerome Powell would push back against the market’s latest advance.
Now, the question on most traders’ minds is: With Powell out of the way, do markets have the all-clear to keep on chugging?
It’s very possible, market strategists said, citing Powell’s remarks about financial conditions during Wednesday’s press conference, which followed the Fed’s decision to hike interest rates by another 25 basis points.
According to market strategists, the upshot is that instead of trying to corral or push back against markets, Powell has decided to disregard their latest moves, treating them as insignificant, or as further evidence that the Fed’s tactics to curb inflation are working without much blowback to the real economy or labor market.
During the opening minutes of the question-and-answer session segment of Wednesday’s press conference, Powell said financial conditions had tightened substantially and that the Fed was no longer concerned with short-term fluctuations.
U.S. stocks seemed to jerk higher in response, as market strategists said Powell seemed to be signaling that higher equity prices and lower bond yields are no longer a threat to the Fed’s inflation-fighting mission.
Some even took issue with Powell’s underlying claim, arguing that according to at least one popular measure, financial conditions are little-changed from a year ago. Among them was Allianz’s Mohamed El-Erian, who sounded off in a tweet, saying “Not sure which index he is using. The most widely cited ones show overall financial conditions as loose as they were a year ago.”
Financial-conditions indexes are supposed to reflect the impact that fluctuations in markets and exchange rates are having on the real economy, according to Guy LeBas, chief fixed-income strategist at Janney, in a phone interview.
By not pushing back when asked, Powell has given equity and bond markets “tacit approval” to keep on rallying, LeBas said.
Others took a similar view.
“The fact that Powell thinks that financial conditions have tightened, when they have eased across a range of metrics in recent months, is dovish,” said Neil Dutta, head of economics at Renaissance Macro Research, in a tweet.
Market participants had seemingly become “obsessed” with the notion that Powell and the rest of the FOMC would push back against looser financial conditions during the run-up to Wednesday’s meeting, LeBas said. This belief even helped rattle U.S. stocks in the days ahead of the Fed meeting, market strategists said.
Instead, Powell repudiated this notion, and rightfully so, according to LeBas, since the impact that market swings have on inflation is rarely so direct.
“Stable FCIs at a relatively high level……….