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Powell’s speech delivers tough lesson to markets: ‘Don’t fight the Fed’


Federal Reserve Chairman Jerome Powell’s warning Friday — that the central bank has no plans to back down from higher interest rates once it finishes raising them — sent ripples across markets, as stocks cratered and short-term yields rose. Powell gave his much-anticipated speech at the Fed’s annual Jackson Hole symposium in a quick eight minutes, but his words carried the expected punch of a hawkish Fed set on beating inflation. Liz Ann Sonders, chief investment strategist at Charles Schwab, said Powell gave a “don’t fight the Fed” address aimed at pushing back against the market view that the Fed would pivot once it reaches a terminal, or end, rate sometime next year. “The market tried, but I think Powell sent the message: ‘You’re wrong to fight what we’re doing here,'” she said. Stocks flip-flopped after Powell’s 10 a.m. ET speech Friday morning, but then turned sharply lower as short-end rates rose. The 2-year yield, which reflects Fed policy moves was as high as 3.45% and was trading at 3.42% after midday. Yield moves opposite price. The S & P 500 was down 2.2% in afternoon trading. The Dow plunged more than 600 points, or about 1.9%, but the tech-led Nasdaq suffered the worst losses, down 2.7%. “Rates are going higher, and they’re not going to reverse and start to come down, and that changes the landscape in terms of long duration stocks versus short duration stocks,” Sonders said. Tech and high growth names are typically hurt when interest rates rise, since they generally trade at a premium based on future profits. The Ark Innovation ETF, the poster child for growth names, was down 5.2% on Friday. Big cap tech names such as Alphabet and Amazon were also down sharply. Expectations were high that Powell would sound very hawkish, since his post-meeting comments in July sparked a stock market rally and sent yields lower. Fed watchers say the Fed’s messaging was hawkish at that point, but markets interpreted Powell, who said rate hikes could start to get smaller, as sounding dovish. Powell began his Jackson Hole speech by commenting that his “remarks will be shorter, my focus narrower, and my message more direct.” Powell then warned that the Fed’s policy could cause some economic pain but that the Fed will not give up on driving down inflation. “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%,” he said. He added that “restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” 2023 rate cut? In the futures market, traders bet the Fed would reach a terminal rate of 3.81% in March. The market also continues to price in about a quarter-point rate cut for the second half of 2023, but that is much smaller than the nearly two cuts that were priced in earlier this month. “There was a little bit of a shot across the bow when he talked about no premature easing. That’s something the market is increasingly looking at,” said David Page, head of macroeconomic research at AXA Investment Management. “In many ways, it was as hawkish as expected without delivering anything new.” Page said the chairman was trying to avoid a stock market rally after his comments, since that would indicate traders could still see the Fed pivoting. “Certainly Powell hasn’t disappointed. There’s no indication the Fed is easing up its anti-inflation rhetoric,” he said. Page added that Powell has not raised expectations for even more tightening but he reiterated the stance the Fed has already spelled out. Sonders said the stock market could remain volatile. “Sentiment, if we continue to see days like this, could get washed out again,” she said. “I think the short-term swings are likely driven by sentiment. I just think the compression in earnings is still ahead of us.” She added that the S & P 500 ‘s rally off the June low was helped by the view that the Fed would reverse course. She said Powell’s most important message was that the Fed does not intend to back down once it raises interest rates to a higher level. “That doesn’t mean a retest of the lows has to be in the mix,” she said. Strategists noted Powell did acknowledge that a three-quarter point rate hike is possible in September, but stressed the Fed will be data dependent. That makes next Friday’s August employment report and the consumer price index on Sept. 13 more critical for markets. The market has been debating whether the Fed will raise by 0.50 of a percentage point, or 0.75, as it did in both June and July.

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