Powell Redux – Or Powell Deja Vu

&

Back on October 3, 2018 then newly appointed Federal Chairman Jerome Powell made the rookie mistake of stating that “interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral.  We may go past neutral, but we’re a long way from neutral at this point, probably.”  The financial markets took this as possible too hawkish of a position by the Fed regarding monetary policy, subsequently selling off more than 20% during the fourth quarter, culminating on December 24, a day we dubbed the “Christmas Eve Massacre.”

 

As a result of the above statement as well as the impact of four rates hikes during 2018, the final one on December 20, the economy slowed to the extent that the Fed was forced to actually cut rates three times during 2019.  Shortly after the close of2019, COVID hit, changing the entire world and turning the economy upside down.

Fast forward to this past Monday when Chair Powell, in an appearance before a Senate Committee stated that “at this point, the economy is still very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.”

 

Although we agree with this evolution from a dovish to hawkish Fed, the change in tone and most likely future monetary policy does not come without risk to the economy and the stock market.  The most obvious risk being that the new Omicron variant is perhaps more contagious, poses a greater degree of reinfection risk and more lethal than previous mutations from the initial COVID virus that has killed more than 700,000 Americans and more than five million people worldwide.

 

An additional risk pertaining to COVID is that regardless of the ultimate impact on the health of those infected, global commerce slows down as anticipatory fears mount, countries close borders, supply chains get disrupted, logistics get more difficult and labor is reluctant to return to work.

 

In addition to the concerns over the economic impact of the pandemic/endemic, the Fed has to deal with rising inflation.  Chair Powell also addressed this issue when testifying before congress this past week noting that “we tend to use the word transitory to mean that it won’t leave a permanent mark in the form of higher inflation.  I think it is a good time to retire that word and try to explain more clearly what we mean.”  As of now, we think that Powell believes that inflation has become more persistent but will not embed itself in the economy and become a long-term of structural issue. This is a tough tightrope to navigate and does not put Chair Powell or the Fed in an enviable position.

 

At this time, investors should expect increased volatility not only as a result of the issues noted above, but also as a result of year-end portfolio adjustments made by both professional and retail investors.  However, we also believe that the secular bull market is intact and patient investors will once again be rewarded.  Get your shopping list together.

 

Please note that all data is for general information purposes only and not meant as specific recommendations.  The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur.  Please research any investment thoroughly prior to committing money or consult with your financial advisor.  Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio.  To contact Fagan Associates, Please call 518-279-1044.

Similar Posts