Powell Stands Firm–for Now


As stocks fell for a fifth consecutive day Wednesday, investors thought they’d hear words of encouragement from Federal Reserve Chairman Jerome “Jay” Powell.

After all, one of his predecessors, Alan Greenspan, was behind “the Greenspan put”—the message (nod, nod, wink, wink) that if market conditions got rough, the Fed would stay steady or cut rates to put a floor under the market.

That policy mostly continued under Ben Bernanke and Janet Yellen. Bernanke, having barely survived the financial crisis and Great Recession, was understandably cautious. So, when his hint that the Fed might stop buying securities triggered a “taper tantrum,” Bernanke held off. The Federal Open Market Committee (FOMC) didn’t raise rates once during his tenure.

Yellen was only slightly less cautious: She waited until December 2015 to raise fed funds above zero for the first time in seven years, and raised it only five times during her tenure, despite an economy that was growing nicely.

Jay Powell, however, is taking a different  path.

The Fed chairman already has raised rates twice since taking over in February, and seems on track to raise them again when the FOMC meets again next month. Though he’s continued Yellen’s tradition of promising “gradual” rate hikes, compared to his predecessor his planned hikes are more “regular” than gradual, and will likely continue  in 2019.

But in a speech in Dallas this week, Powell made it clear that he’s his own man.

First of all, he indicated that President Trump’s ranting about the Fed’s raising rates (he called the central bank “crazy” and “loco”) had fallen on deaf ears.

“Our accountability is to Congress,” he said (italics mine). “We have a very important job that Congress has assigned us and we have the tools to do it.” Translation: Butt out, Mr. President.

He also declared, at least rhetorically, his independence from the stock market, calling stock prices “one of many factors” the Fed looks at in making rate decisions. That flies in the face of a growing chorus of Wall Streeters who love the idea of higher rates, but not when it actually happens.

But his most direct declaration of independence came when he discussed his new policy of holding news conferences after every FOMC meeting, not just four times a year, which means the FOMC could raise—or cut—rates any time it meets.

“The market is going to have to get used to that,” he said. “ I think over time folks will get used to the idea that we can and will move at any meeting.”

There’s a new sheriff in town, and it may take time for investors to get used to him. That means higher volatility will be with us for a while.

GoldenEgg Investing will not publish a market commentary next week because of the Thanksgiving holiday.