Fed Chair Powell is a ‘maestro’ who calms markets and averts chaos

Fed Chairman Jerome Powell calmed the markets on Wednesday, resisting speculation that the central bank could wind down its easy policy.

The Federal Reserve sharply boosted its economic growth outlook on Wednesday, but said it would still not see any rate hikes until 2023. She also expects higher inflation this year, but only temporarily.

In a speech to the press, Powell reinforced the message that the Fed will not move away from zero interest rates or bond purchases any time soon. His comments allayed concerns among market professionals that the central bank would soon be talking about winding down some of its easing programs.

The futures market also started to price in for rate hikes from 2023.

“I thought this was one of the best press conferences we’ve seen from Powell,” said Jim Caron, chief global macro strategy at Morgan Stanley Investment Management.

“He came over there and rocked it a little bit, and said, ‘This is what we’re doing. This is what’s the matter. “Wow, mission accomplished.”

Caron said the “reflation trade is intact,” and Powell avoided some of the market backlash that occurred during previous comments.

“The last time he spoke, 10-year returns started to rise to 1.50%,” said Caron. “Everyone expected him to work things out, and he didn’t.”

Caron added that option pricing indicated that investors expected the central bank meeting and Powell’s press conference could have resulted in one of the most volatile Fed events in months.

But the markets were relatively quiet.

Treasury yields fell from their peak of the day and stocks were up. The Nasdaq Composite has reversed its losses to reach 0.4%. The Dow Jones Industrial Average closed above 33,000 for the first time and ended the day at a record 33,015, a gain of 0.6%.

“What I’m telling you is the monetary policy stance we have today, and we think that’s appropriate,” Powell said at his afternoon news conference.

While there has been speculation that the Fed might indicate it might be willing to talk about reversing its bond purchases, Powell said this would not happen until economic data makes “substantial progress.”

Bond yields have soared on the improving economic outlook, the expected boost from the $ 1.9 trillion fiscal stimulus package and concerns that inflation could warm.

The 10-year yield has risen from about 1.07% over the past six weeks to a high of 1.68% earlier Tuesday. The return, moving against the price, was 1.64% late in the day.

According to updated forecasts from the members of the Federal Open Market Committee, gross domestic product will increase by 6.5% in 2021 and slow down in later years.

“I think the market was looking at it for a few directions just in an effort to understand how far the Fed would upgrade its vision, based on an additional $ 2 trillion in stimulus,” said James McCann, senior economist at Aberdeen Standard Investments . . “What the Fed hasn’t done is don’t blink.”

The pressure was to enter the meeting. Goldman Sachs economists said in a note that the meeting would be “one of the most critical events for the Fed in some time.”

Powell reiterated that the Fed is not ready to wind down.

“Until we give a signal, you can assume we’re not there yet,” he said. “If we get close to it, well in advance, well in advance, we will give a signal that yes, we are on track to possibly achieve that, to consider tapering.”

Greg Faranello, chief of US interest at Amerivet Securities, said Powell managed to walk a fine line during his briefing.

He said the market was acting like it came in Powell’s eyes. Yields on 10-year Treasury bonds fell and the yield curve – or the difference between interest rates at different maturities – flattened, Faranello said.

“He’s a maestro himself. He’s because of what he’s been able to say … ‘we want higher inflation. We want higher growth … we want all these things and we want low rates too,'” said Faranello. “Without doing anything – think about it – he got it.”

Michael Arone, chief investment strategist at State Street Global Advisors, said the Fed’s message that inflation is not a problem has helped turn the Nasdaq upside down.

“The most important thing Powell has said is that the Fed is not afraid of the inflation boogeyman,” Arone said.

He described inflation this year as “ transient, ” not transient, as everyone says. And then he sees it go down, ”Arone added. “As a result, you see rates falling and the Nasdaq skyrocketing.”