Powell Disappoints Wall Street

Like an expecting father pacing the ward… markets were pacing the trading floors today.

Rate hike or no rate hike? Would the bank wobbles back the Federal Reserve into inaction? Would the cigars go passing around — or not?

Word came issuing at 2 p.m. Eastern. A 0.25% hike it was.

Thus the federal funds rate dangles between 4.75–5%… its highest point since 2007.

What are we to make of today’s increase? Bright MLS’ Ms. Lisa Sturtevant:

The decision to continue its rate increases comes as the Federal Reserve stood between a rock and a hard place, battling conflicting goals of bringing inflation down with stabilizing uncertainty in the financial sector.

Today’s decision suggests the Fed believes the worst of the banking crisis is behind us, noting in its press release that the U.S. banking system is sound and resilient.

Just so. Yet what did Wall Street think? Was today’s hike a boy or a girl?

The stock market could not decide initially.

Stocks took a bounce — but only slightly. Yet within the hour they took authentic jumps… and the cigars began passing around. Why?

Because Wall Street deciphered the Federal Reserve’s post-announcement telegraph. From which:

The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

“Some additional policy firming” is a noticeable retreat from the Federal Reserve’s previous threats of  “ongoing increases.”

Wall Street believed — evidently — that Mr. Powell and mates will soon abandon the warpath.

Yet within another hour the stock market undertook a reassessment… and the Dow Jones Industrial Average suddenly took a 250-point swooning.

The swooning continued clear through to closing whistle.

The index ended trading down 530 points. The S&P 500 shed 66 points while the Nasdaq Composite retreated 190 points of its own.

Perhaps the Federal Reserve’s orientation is not so “dovish” after all. Mr. Mike Loewengart of Morgan Stanley Global Investment:

Market watchers could interpret today’s rate bump as support for the Fed viewing recent bank woes as idiosyncratic, which is a good thing for those worrying about systemic cracks in the system.

Further, the Fed hinted a pivot may be coming soon, so another piece of good news for investors to chew on. But keep in mind that this doesn’t mean rate cuts are coming anytime soon, and the Fed has hinted it will do whatever it takes to get inflation back near 2%. So even if the Fed stops at 10 hikes, volatility is likely to remain the name of the game.

Jim Rickards appeared with Charles Payne of Fox Business this afternoon. There Jim dismissed the dovish theory:

Inflation is job one. If there’s going to be a recession, too bad, if unemployment goes up, too bad. We’re not going to stop until we’re at a level, the so-called terminal rate, where inflation will come down on its own…

They’re not done. I would expect that they’ll raise again in May… A lot of other bad things may happen, but they’re determined to get inflation under control.

Yet what about the Federal Reserve’s balance sheet? It had been culling the balance sheet to accompany its rate increases.

But the recent bank rescues entailed a great balance sheet expansion. Thus the Federal Reserve works at cross purposes, explains Jim:

Quantitative tightening is out the door because of this bank lending program. They’ve invited every bank in the United States to send them $1 trillion of bonds, and they’ll pay for them at par with newly printed money. So that’s going to be quantitative easing. So they’re easing on balance sheet side and tightening on the rate side at the same time. So this is the finesse. They aren’t trying to have it both ways. But that means more rate hikes if they’re going to be easing on the balance sheet side.

Thus the Federal Reserve is running with the hare and hunting with the hounds.

It is running with the hare of balance sheet expansion… while hunting with the hounds of interest rate raisings.

Can it manage the finesse?

We lack a definitive answer. Yet given the Federal Reserve’s nearly impeccable record of failure, we hazard it cannot.

Gold arrived at its own verdict this afternoon — up $36 and change.