Jay Powell Demolishes the Market Narrative… Again

The nine-month long battle between Fed policy and the market narrative has finally ended. Fed Chair Jay Powell drove a spike through the heart of the narrative with his testimony to Congress on March 7 as reported in this article.

Here’s the background: Inflation got out of control in late 2021 and early 2022. The Fed responded with rate hikes beginning in March 2022. Both the Fed and the markets agreed that rate hikes were appropriate (and clearly too late in coming). As the rate hikes continued through the March, May and June 2022 FOMC meetings, the stock market corrected sharply downward, which was to be expected in a monetary policy tightening cycle.

By July, the markets had seen enough. They launched the “pivot” narrative. This said that the Fed would soon get to the terminal rate (that’s a rate high enough to bring inflation down on its own without further rate hikes), inflation would in fact come down, and the Fed would pivot to rate cuts and bring the economy in for a soft landing.

Prospective rate cuts became a reason to buy stocks, which Wall Street wanted all along. In fact, the market did rally in July and August. Then Powell lowered the boom.

In his Jackson Hole, Wyoming speech on August 26, 2022, he made it clear that rate hikes would continue, inflation was not yet under control, and recession and higher unemployment were likely. The market slumped in September, but then began to rally again in October on a revived pivot narrative. The narrative was like Dracula – you couldn’t kill it.

Powell continued his warnings on September 21, November 2, November 30, and December 14, 2022. The market pivot narrative continued, and the market rallied further in December 2022, and January 2023. It seemed Wall Street had forgotten Rule #1: Don’t fight the Fed.

Unfortunately, the Fed showed a dovish streak at the FOMC meeting on February 1 as the rally continued. Then the Fed got a bucket of ice water in the face with data beginning on February 3. Job creation boomed, unemployment fell, retail sales surged, and inflation (which had been trending down since July) suddenly went up again.

The Fed got religion and on March 7, Powell made it clear for the seventh time that rates were going up and no pivot was in sight. This time the message sank in.

Wall Street threw in the towel and stopped fighting the Fed. Stocks went down and they will stay down until the Fed itself (not the market) says, “No más!” The narrative is dead. Long live the Fed!

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