Nov 3, 2022 - Economy & Business

Powell's mic drop: How the Fed moved markets

Data: FactSet; Chart: Axios Visuals

It wasn't quite a pivot, but investors were initially pleased to see the Fed's policy statement flick at the possibility that it could slow — or even pause — its rate hikes. Then came the presser.

Driving the news: Markets whipsawed in the aftermath of another 0.75 percentage point rate hike on Wednesday — the sixth hike of the year. Stocks first rose on the statement, then flopped during and after Fed chair Jerome Powell's post-announcement press conference.

The big picture: The rate hike wasn't the real news.

  • What first moved the markets was the bit of the Fed's monetary policy statement — released at 2pm ET — that hinted the bank may want to pause and assess how hard this year's series of fast, steep rate increases hit the economy, before carrying on.
  • Context: The housing market, in particular, has been hard hit by the shock of 7% mortgage rates and has been weighing on economic growth.

What the statement said: "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."

  • Stocks briefly climbed into positive territory, and short-term bond yields fell, suggesting investors interpreted the statement to mean the Fed could start to lighten up on rate hikes, sooner rather than later.

Yes, but: Then came the Fed's press conference — at 2:30pm ET — in which Powell pretty clearly quashed the idea that the central bank would pause rate hikes any time soon.

  • "It's very premature, in my view, to think about or be talking about pausing our rate hikes," Powell said. "We have a ways to go."
  • That statement helped push bond yields sharply higher as investors reversed their previous bets on the possibility of a pivot or a pause.
  • Stock markets, in turn, sank sharply, with the S&P 500 closing the day down 2.5% in its third consecutive decline.

The bottom line: Wednesday's market wobbles might look like a roller coaster ride to nowhere. But that's kind of missing the point.

  • The Fed was able to raise the idea of a pivot — putting it on the market's radar — while not committing to any particular course of action.
  • That's a nifty trick to pull off, and will make it easier to bring up the topic again if the bank actually needs to change course.
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