Features

Powell’s “put” looks poorly timed

Jerome Powell went out of his way to placate liquidity-addicted markets last week. But if the US economy bounces back, the Fed may find itself having to raise rates – and very quickly too.

933_MW_P04_Markets
The Fed has signalled it will ride to the rescue again

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.

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.

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
I wish I knew what a share was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what a share was, but I’m too embarrassed to ask

When people talk about investing, they often refer to putting money into “shares”, or buying “stocks and shares”. But what is a share anyway?
28 Oct 2020
Robin Geffen: dividend cuts aren't all down to Covid
Stockmarkets

Robin Geffen: dividend cuts aren't all down to Covid

The seeds of recent dividend cuts and cancellations were sowed many years ago, says veteran investor Robin Geffen.
25 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020