Experts Break Down Fed Commentary, Markets Disagree With Powell

Investors clearly didn’t get what they wanted to hear from Federal Reserve Chairman Jerome Powell on Wednesday. The S&P 500 and the Dow Jones Industrial Average dropped to their lowest levels of 2018 after the Fed raised interest rates for the fourth time and said investors can expect two additional rate hikes in 2019.

A number of analysts and experts have weighed in on the Fed’s decision and what it means for the markets. Here’s a sampling of what they’ve had to say.

Fed Put Disappearing

Morgan Stanley economist Ellen Zentner said the Fed is demonstrating tough love for the U.S. economy.

“The message from core FOMC policymakers in recent months has been clear: they intend to stretch the expansion for as long as possible, and some moderation in financial conditions after a prolonged period of easing over the prior year arguably might serve that goal,” Zentner wrote.

Appaloosa Management hedge fund manager David Tepper told CNBC Wednesday’s news is a signal the Fed is no longer supporting the stock market.

“Powell basically told you the Fed put is dead...cash is not so bad,” Tepper said.

Salman Ahmed, global investment strategist at Lombard Odier Investment Managers, said the subtle changes to the Fed’s outlook were not enough to ease market fears.

“It appears that risky asset markets wanted a stronger 'put' from the Fed given the ongoing recession obsession taking over the market sentiment,” Ahmed said.

Markets Disagree With Powell

DataTrek Research co-founder Nicholas Colas said Wednesday’s press conference was a sign the Fed and the market are completely at odds about what to expect from the economy in 2019.

“It isn’t just Chair Powell that thinks markets have it wrong. The Federal Open Market Committee is also collectively confident that 2019’s US economic growth will merit further rate increases,” Colas wrote.

Deutsche Bank analyst Peter Hooper said the Fed actually took a step toward a more dovish approach on Wednesday, but it simply wasn’t as big of a step as investors had anticipated.

“Although more rate hikes are likely coming, the timing is now less certain, as the Fed has clearly moved closer to slowing the current pace of tightening,” Hooper wrote.

CNBC's Jim Cramer said the knee-jerk market reaction could have been much worse than it ended up being given what the Fed had to say: “You could easily argue that we should've been down 1,000 Dow points."

Investors Overreacting?

Nigel Green, founder and chief executive of deVere Group, said the Fed appears willing to pause its tightening program in 2019 if circumstances deteriorate.

“The Federal Reserve has signaled that next year’s planned interest rate hikes may be delayed if economic data weakens, which last week’s relatively modest payrolls data and November’s inflation data suggests is the case,” Green wrote.

A Wealth of Common Sense’s Ben Carlson pointed out on Twitter that the 12.6 percent decline from the S&P 500 in the period leading up to Wednesday’s rate hike was the largest such drop in history, despite the fact that inflation is just 2.2 percent.

This is now the worst S&P 500 drawdown leading into a Fed rate hike since 1970. Here are the top 5 along w/the inflation rate at that time

One of these things is not like the others pic.twitter.com/Fzi5rCxJlX

— Ben Carlson (@awealthofcs) December 19, 2018

Price Action

The negative market reaction to the Fed spilled over into Thursday morning trading. The SPDR S&P 500 ETF Trust SPY was down another 0.3 percent, and the SPDR Dow Jones Industrial Average ETF DIA was down 0.2 percent.
 

Related Links:

The Federal Reserve Issues Fourth Rate Hike Of 2018

Credit Suisse Sees 15% Upside For Stocks In 2019