Wednesday's Market Minute: Get Ready For Powell To Play Hardball

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Does Jerome Powell care about stock market volatility? Someone’s gonna ask today.

Perhaps a more sophisticated version would be, at what point does he see equity market weakness limiting the economic recovery? Or to what extent does a stock decline do the job of higher interest rates by tightening economic conditions? 

We may be nowhere near a level that’s frightening to the Fed chief. Or at least to the extent he would admit it. It’s an educated guess based on a few pieces of evidence, starting with the simple fact that neither the S&P 500 nor the Nasdaq-100 are even in a bear market. If what is historically normal corrective price action becomes a reason to flip-flop on hawkish policy guidance, we may have some real issues. 

It’s not crazy to think such a flip-flop could happen, though. After all, Powell did a sudden about-face in 2019 after a near-20% decline in the stock market. Meanwhile stocks are more tied to household wealth in America than ever. The vulnerability is a real possibility.

But he’ll likely play his version of hardball, which is to act unconcerned about recent volatility. The biggest reason is because the New Boss is a lot different than the Old Boss. In 2018, Trump was haranguing Powell for being too aggressive. Last week, Biden reminded the world that the fight against inflation lay squarely on the Fed Chair’s shoulders.

There’s also recent precedent for Powell choosing to test the market’s capacity for turbulence. In March last year, he was asked by the Wall Street Journal’s Nick Timiraos about volatility in the Treasury market, and largely demurred. His lack of pushback alone caused bonds to plunge lower. I suspect we may see a repeat with stocks. 

Powell’s motive tomorrow will be to outline the path to combating inflation without sinking the economy, but it’s too early to expect him to say stock volatility poses a threat to that goal. He probably won’t rock the boat with any shock plans like a 50bps hike or promise commitment to expectations in the Dot Plot, and that could help markets in the short-term. 

If he responds to the inevitable question about stocks with tough love, there could be more selling. This is a fragile market susceptible to shock from rabid speculators who spent the past two years convincing each other the Powers That Be will never let stonks go down. Powell's already warmed them up for a big letdown, and, if given the opportunity today, he may deliver the jugular.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.