Friday's Market Minute: Powell Puts Bulls In The Penalty Box

Fed Chair Powell delivered prepared remarks on the state of the global economy yesterday which were not well accepted by the markets. All major equity indices closed in the red as predictions for a recession have been growing. Hawkish comments on interest rates sent 10-year Treasury yields higher once again, causing a flight out of long-duration bonds and equities. As rates rise, market participants prefer more liquid fixed-income securities with less duration risk.

The market had already priced in a 50-basis point hike for the May FOMC meeting, and Jay Powell appears to have added an additional expectation of more aggressive hikes going forward to ensure inflation expectations remained anchored. The Fed is in a bind as it tries to negotiate a soft landing for the economy at a time when rate of inflation is at a level not seen in four decades. The Fed can tame the demand for money using traditional monetary tools, but it has essentially little influence over supply-side constraints.

Higher rates will dampen inflation due to a retrenchment in demand, but the risk of recession increases as a result. Based on the combined strength of the labor market and productivity growth, the Fed is confident about the growth prospects of the economy and is willing to take a more aggressive rather than measured approach on rates. Equity bulls have been blindsided by a Fed that has not been on their side since the end of 2021. Buy-the-dip mentality works when monetary conditions are more predictable and the Fed makes slow, measured moves on rates. Therefore, until there are some visible signs of normalized inflation, it appears the bears remain in control.

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