Pivot, Pause, *Poof*

Well, that was quite a day, wasn’t it?  A 2.5% drop in the S&P 500 (SPX) and a 3.5% in the NASDAQ 100 (NDX) indices will always raise some eyebrows.  When the drop is the direct result of comments made by the Federal Reserve Chair at a post-FOMC press conference, we have no choice but to parse the messaging carefully for clues about the true state of monetary conditions.  The short explanation is that Chair Powell once again dashed traders’ hopes, even if those hopes had been downgraded from “pivot” to “pause”.

The FOMC statement itself was inoffensive and led to a brief equity rally.  The only notable change was the addition of these two sentences:

“… in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

If you were inclined to be a buyer, then this shouldn’t have been worrisome – and possibly a mild positive.  The Fed has been very clear about trying to return inflation to 2% – that’s nothing new – and it should be encouraging to know that the Fed is likely to be less mechanical and more judicious in raising rates.  If you were looking for a pause, then perhaps that second sentence could have offered some hope.

The hope began to evaporate as soon as the Chairman took the podium a half hour later.  When I was helping manage our market-making operations, my colleagues certainly tired of my usual post-FOMC admonition that the first move was often the wrong move.  After a brief introductory paragraph, Powell offered the latest in a series of reminders that the Fed would be continuing to act assertively:

Today, the FOMC raised our policy interest rate by 75 basis points, and we continue to anticipate that ongoing increases will be appropriate. We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. In addition, we are continuing the process of significantly reducing the size of our balance sheet. Restoring price stability will likely require maintaining a restrictive stance of policy for some time.

And it got worse for the bulls from there.  Powell’s tone was strident throughout, then at the 38:48-mark in his press conference, he seemed to turn notably hawkish when a reporter indicated that the market was reacting positively to the FOMC statement and press conference.  This was Jackson Hole Powell once again, and markets that had been giving back gains and declining anyway, accelerated to the downside.

The key is the Federal Funds futures.  Prior to the meeting, they showed a 5.05% peak in May2023 and a cut by December.  They now show a peak of 5.15% in June and a cut no earlier than January 2024.  The absolute level of rates isn’t much higher, but the idea of rate cuts just moved further into the future.  We will be monitoring both changes in the peak rate and the timing of potential cuts.

As of now, we see markets off their opening lows.  Let’s see if the narrative can be spun positively once again.  We noted yesterday that we preferred to measure the market’s reaction to FOMC meetings over the subsequent three-day period, rather than FOMC day itself, because traders tend to react abruptly while investors take time to consider outcomes.  Investors don’t seem to be liking what the heard, at least not yet.