Well, there’s a new sheriff in town, and his name is Jerome Powell. The new Federal Reserve Chairman held a solid press meeting, opening his bottle of water before he commenced to taking questions.
He was mostly straightforward, although he became visibly irked over persistent questions over a potential trade war with China, which he says that it poses no threat to the Fed’s economic outlook, even though a few members brought up the topic.
These participants stated that business folks have articulated concerns over a potential trade war but reiterated the trade policy isn’t within their purview.
Economy Rolling Along
Although the Fed increased its economic outlook for a range of metrics, it didn’t change its inflation estimate, which keeps the Goldilocks scenario in place.
The Fed now sees a stronger Gross Domestic Product (GDP) growth and lower unemployment rate this year through 2020. All these changes coincide with the only fractional change in the headline and core Personal Consumer Expenditure (PCE) inflation projections.
Economic Projections | 2018 | 2019 | 2020 | |
GDP | Current | 2.7 | 2.4 | 2.0 |
December | 2.5 | 2.1 | 2.0 | |
Unemployment | Current | 3.8 | 3.6 | 3.6 |
December | 3.9 | 3.9 | 4.0 | |
PCE Inflation | Current | 1.9 | 2.0 | 2.1 |
December | 1.9 | 2.0 | 2.0 | |
Core PCE Inflation | Current | 1.9 | 2.1 | 2.1 |
December | 1.9 | 2.0 | 2.0 | |
Where Rates Go From Here?
Still, the biggest question going into Powell’s first Federal Open Market Committee (FOMC) gathering remained with the answers, because he didn’t give investors a bullseye:
- Six dots are at 2 to 2.25, suggesting three rate hikes in 2018
- Six dots are at 2.25 to 2.50, suggesting four rate hikes in 2018
- One dot suggests five rate hikes
- Two dots (Bullard and Kashkari) suggest only two rate hikes
Conclusion
The market on Wednesday was confused enough to sell stocks into the close, but I don’t think that’s a big deal. It’s true this new sheriff has to get his posse on the same page, but that will happen over time.
I like that Powell didn’t take the bait on potential tariffs, which could be announced today. His comment that it won’t change the Fed’s outlook angered the political class but is important for investors that have been selling on recent headlines.
The bottom line, for now, is the U.S. economy is on fire and the Fed will try it’s best not to be too aggressive. As for the idea, more press conferences mean more rate hikes. There have been a lot of rate hikes without press conferences, and that’s a narrative I do not subscribe to.
Message of the Market
There was intriguing action:
- Russell 2000 rallied as other large equity indices edged lower
- Gold popped more than $12.00
- 10-year yield finished above 2.9%
I don’t put much into the two hours of trading at the conclusion of the FOMC gathering; the fact the Dow couldn’t hold onto a two-hundred-point rally hurts less, but this isn’t a market that can afford to keep losing midday bumps.
Today’s Session
So, Wall Street slept on the Fed’s decision, and Powell’s press conference, and decided there might be four rate hikes this year, and that’s enough to sell stocks. I don’t agree four hikes should be baked into our assumptions, but it was interesting when Powell suggested the Fed wouldn’t interrupt asset sells to deal with changes in economic conditions.
There are also worries about pushing back against China, even as everyone agrees they are ripping off America.
Once again, investors are going to have to understand the fundamentals and value proposition of their holdings and be ready to buy weakness. I have a list and will continue to refine it – these are the moments that create opportunities that allow investors to beat the market and “experts” big time.
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