Shortly after a bullish jobs report for December sparked a small rally in the ailing stock market, Fed Chairman Jerome Powell ignited an even stronger surge after he delivered just what the doctor ordered – that the Fed will be flexible on monetary policy and it is in no rush to raise interest rates.
Stocks were already trading higher after the release of December labor data that showed job and wage growth were still solid despite the market’s effort to convince investors otherwise. Stocks have been pressured since mid-December when the Fed raised its benchmark interest rate a quarter-point while issuing a somewhat-hawkish statement despite lowering its rate hike projections from three to two. Furthermore, Fed Chair Powell also said that rate hikes would continue to be gradual and data dependent.
Since mid-December, investors have been expressing disagreement with Powell’s assessment of the economy, saying the Fed had it all wrong and that the economy was weakening. This caused investors to dump higher-yielding stocks, raising stock market volatility and driving investors into the safe-haven Treasurys.
Powell triggered an additional surge in the markets after he walked back the comment made in December that shook up investors and made him sound like his sole mission was to reduce the central bank’s balance sheet.
In December, Powell said that the Fed’s balance sheet reduction was on “autopilot”. On Friday, his softer tone eased investor concerns about further tightening, noting that the Fed will be flexible with all of its monetary policy tools, including the important balance sheet.
Fed Monitoring Global Markets
Powell also said the Fed is monitoring the financial markets despite criticism from some analysts that the central bank was ignoring the market’s recent heightened volatility.
“We’re listening carefully with – sensitivity to the message that the markets are sending and we’ll be taking those downside risks into account as we make policy going forward,” Powell said.
Powell Recognizes Other Fed Tools
Powell also addressed the issue that the central bank was overusing interest rate policy in an effort to prevent the economy from overheating. “Some years ago, we decided that rate policy was going to be the active policy tool and the balance sheet would be allowed to shrink gradually and predictably in the background,” he said.
He further added that that the Fed is able to “adjust policy quickly and flexibly” if it sees problems.
“Wouldn’t Hesitate to Adjust Policy”
“We wouldn’t hesitate to change it and that would include the balance sheet. We’re hearing a lot from different groups of people about the role the balance sheet normalization may be playing in the market,” Powell said.
In response to the observation that the Treasury issues more securities when the Fed’s balance sheet holdings mature, Powell said, “We don’t believe our issuance is an important part of the story in the market turbulence that began in the fourth quarter of last year.”
“If we came to view that the balance sheet normalization or any other aspect of the normalization was part of the problem, we wouldn’t hesitate to make a change,” he said.
Powell’s Comments Were Dovish
Traders said Powell’s comments were perceived as dovish because he said the Fed had no preset path for policy and could be patient when it comes to future interest rate hikes. Powell also acknowledged that inflation was muted and that the central bank would be in no hurry to raise rates. This marked the first time that Powell had used the word “patient”, something that former Fed Chair Janet Yellen used several times during her appointment.
This article was originally posted on FX Empire
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