The 1 Thing Jerome Powell Can’t Say

Federal Reserve Chairman Jerome Powell

Stocks treaded water this morning as the Fed’s two-day November meeting continued. This afternoon, Fed Chairman Jerome Powell will deliver remarks on monetary policy.

Many analysts are expecting a formal taper declaration, in which the Fed will begin to reduce its monthly asset purchases (currently at $120 billion per month) by $15 billion. $10 billion of that reduction would be in Treasurys and the remaining $5 billion in mortgage-backed securities.

In the grand scheme of things, it wouldn’t be a huge taper. Stocks probably won’t “flash crash” if Powell announces one today.

What would have a more profound impact is Powell’s commentary on rates, and in particular, whether rate hikes are coming in 2022.

“We all think we know what will come out from today’s meeting: a gradual start of the tapering of the bond purchases program,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote, in a note.

“[A] taper announcement will likely be seamless, what may be less seamless is the rate discussion.”

That’s the million-dollar question:

Will rate hikes actually happen?

If Powell doesn’t want to disturb the market, he won’t mention a rate hike timeline in his post-meeting remarks. Sure, he’ll talk about rates at a high level.

But discussing an actual rate hike schedule would undoubtedly shift sentiment in a major way, even in the wake of a better-than-expected earnings season.

“With the S&P 500 up 13 days in the past 15 ahead of the Fed beginning the process of draining the punch bowl, there certainly is a lot of confidence that strong earnings will overcome everything,” explained Bleakley Advisory Group CEO Peter Boockvar.

“That said, global monetary tightening is taking place, not just with the Fed, and that should not be ignored either.”

The European Central Bank is already tapering. The Bank of Canada just ended its asset purchases, too. The Fed could very well follow suit this afternoon.

And if it does, investors may view it as confirmation that the US economy is finally strong enough to have the “training wheels” taken off.

Or, bulls might look at the taper as the first step toward fiscal abandonment by the Fed (the market’s greatest ally during its post-Covid rally) and a series of rate hikes down the road.

“The Fed is trying to separate the two and saying, listen, the fact that we start with tapering now doesn’t mean that we start hiking interest rates later on,” said Willem Sels, HSBC Global Private Banking and Wealth chief investment officer.

“The reason, of course, is because there is that uncertainty around the economy, around the labor market, which still has five million more people out of the job market than before the pandemic. And then also, when will inflation come down?”

It’s the “damned if you do, damned if you don’t” situation we’ve talked about for months. The Fed finds itself in a tough spot yet again as economic conditions deteriorate heading into the new year.

As a result, investors shouldn’t expect any bombshell headlines from Powell today. He’ll probably play it close to the chest this afternoon, revealing only a taper and nothing more, allowing bulls to potentially resume their buying frenzy.

Provided, of course, that they can effectively “reboot” the market’s bullish enthusiasm, which has certainly waned over the last few trading sessions.


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