Ever since Alan Greenspan presided over the US central bank in the 1980s, markets have been able to count on the "Fed put": the US Federal Reserve's tendency to shore up the stockmarket whenever investors are feeling rattled. And it seems the current chairman, Jerome Powell, is no exception. Following December's sell-off, he went out of his way to placate liquidity-addicted markets last week.
Not only did he suggest interest-rate rises in the US might be off the table this year, but he also indicated he is open to adjusting the pace of quantitative tightening (QT, the withdrawal of liquidity from the system by selling bonds previously bought with printed money). Only six weeks after it raised interest rates, it seems the Fed is wary of strangling growth by hiking too far and shrinking its bond portfolio too quickly. Crucially, Powell acknowledged the current market panic had some bearing on his decision.
Why the Fed is rattled
While the jobless rate rose slightly to 4%, this is only due to the partial government shutdown that ended in January, notes Gina Chon on Breakingviews. In his announcement, Powell pointed to a host of downside risks, including the recent market volatility, trade tensions and slowing global growth. "There is nothing necessarily wrong or embarrassing about changing direction," says John Authers on Bloomberg.
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But "if anything, several of thoserisks have eased in recent weeks," as Andrew Hunter of Capital Economics points out. The rebound in the stockmarket and narrowing in credit spreads has left financial conditionslooser than they were in late December. There was also positive news this week on the trade talks with China, with Trump set to meet President Xi Jinping "in the near future" to continue negotiations.
Is it looking the wrong way?
Indeed, if the economy bounces back and inflation gathers more momentum (remember wage growth has already reached a ten-year high) the Fed may find itself having to hike rates and very quickly too. That would give investors a nasty shock especially now that Powell has just signalled he's got their back.
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