jerome powell speech today

jerome powell speech today

The Impact of Jerome Powell’s Speech Today

1. Introduction

Fed Chairman Powell prepared a fairly unequivocal statement when he said, “Through the end of September, we will maintain the target range for the federal funds rate at 2 percent” – that’s signal enough. These are meant to be policy rates, and already the markets are taking the view that the Fed has either deluded or tied itself into a strategy to get out of the woods. He went on to say, “In line with our dual mandate, this should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.” Powell is being nuanced in his use of the phrase “dual mandate” because the funds rate really addresses the inflation leg of the mandate, whereas creating the conditions for “moderate growth” goes significantly beyond it. This to us sounds like a banker preparing to deliver a massive injection of liquidity, whether it be through rate cuts or expanding QE. The sweetener is the backward guidance at the end of his statement – “As I have noted previously, changes in the target range for the federal funds rate are not mechanically tied to our asset purchase program.” This is Powell saying that the Fed is willing to cut rates below where they are purchasing assets if necessary. So a CCP-initiated cut in the future could be on the cards too.

2. Key Points Addressed by Jerome Powell

Powell addressed a variety of key topics that greatly impact the economy today. He discussed the unemployment rate, employment, participation rates, labor force, and wages. Powell expressed the current unemployment rates and compared them to the unemployment rates before the financial crisis. Unemployment has fallen significantly over the past years, and for the past year and a half, the unemployment rate has been at 4.5 percent, which is a historically low figure. Unemployment has also declined for all major worker groups. The rates for adult men and women are currently at 4.1 and 4.0 percent. These are the lowest unemployment rates for both groups in over a decade. The unemployment rate for teenagers is 13.9 percent, while unemployment among whites is 3.7 percent. Both of these are the lowest figures in the history of collecting this data. Unemployment rates among blacks and Asians have always been inconsistent. The rates of unemployment among these two groups are currently 7.0 percent for blacks and 3.1 percent for Asians. These are considerably higher unemployment numbers among these two ethnicities, but an improvement in gaps relative to rates seen in the past. The unemployment rate among Hispanics is 4.7 percent, the same figure as the national unemployment rate, and has seen little change over the past year. Despite these improvements for the better, Powell expressed his desire for the unemployment rate of minorities to be significantly lower than the national average unemployment rate. Switching from the unemployment rate, Powell touched on employment, participation rates, wages, and various types of employment statuses. The employment-to-population ratio has increased over the past year. This ratio has moved up from 78.2 to 78.7 percent and has done so in part due to the increase in prime age employment. The prime age employment has increased from 79.0 to 79.3 percent. The last time this figure was near 80 percent was in 2007. The increase in prime age employment is a positive sign for a healthier labor market. A labor market that Powell hopes will continue to improve and provide opportunity for employees in the near future. There are still 4.7 million part-time workers who are in this status due to economic reasons and would like full-time work. This is a decline of 798,000 over the past year and a positive change for workers of this type. The number of people marginally attached to the labor force is 1.6 million. This number has shown little change over the past year. Disclaimer: “A marginally attached is a person who is not in the labor force, wants and is available for work, has looked last year, but is not currently looking because they believe there are no jobs available or there are none for which they would qualify for. During the past month, the number of discouraged workers” has declined by 122,000 to a total of 355,000. These are individuals who have given up on finding a job because they believe no jobs are available for them.

3. Market Reaction and Investor Sentiment

Jerome Powell’s remarks have a colossal impact on the market. Statistics show that the S&P 500 jumps an average of 0.44% on every Federal Reserve policy announcement day, with over 80% of the movement occurring within the 30 minutes before and after the policy announcement. The document goes on to analyze market reactions around the world on the days of FOMC policy announcements. It is important to remember, though, that the mere speculation of what Powell may say has impacted markets. This has been evident in the 4th quarter of 2018 when Powell suggested that the Fed was a long way from neutral on interest rates. The S&P 500 dropped from 2810.5 to 2346.58 2 months later. Although the speech topic on that day was not related to fiscal policy, it was clear that Powell’s statements were garnering heavy market attention. High market sensitivity to Fed policy news typically implies that the speeches have a potent direct impact on asset prices, causing large flows of money in or out of certain market sectors. This is confirmed by the FOMC’s shift toward an explicit inflation target when Bernanke welcomed increased transparency and communication, which he believes has a stabilizing effect on financial markets because it reduces the uncertainty regarding future moves of the policy. Coming back to the document, a one-day event study is conducted assessing the impact of the Federal Reserve monetary policy on equity prices. A significant positive abnormal return was found to occur on the days of policy announcements, indicative of the fact that the changes in monetary policy signal a change in future cash flows and discount rates on equities. Further qualitative discussions with portfolio managers supported the research findings as events such as changes in the 1994-1995 rate hiking cycle were considered some of the best days to be invested in growth and value stocks due to the large spread widening between the two. The speech was effective in achieving its desired results on numerous market sectors. The bond market has a similar reaction with a policy tightening phase from a relatively recent period in contrast to today, prompting the research of how the FOMC’s actions during 1979-1981 affected interest rates on issues of US government and other investment-grade bonds. A significant rise in short and long-term rates was identified compared to market expectations and what was predicted in the Committee’s econometric model. This resulted in a huge increase in interest costs, worked as a disincentive to issuing debt, and led to funding problems and increased borrowing from the Federal Reserve by banks and the public, all highly detrimental to bond issues. Although not queried specifically by the author, Home Loan Mortgage Corporation pass-through mortgage-backed securities were particularly hit hard during the Carter and Reagan administrations with high and volatile interest rates. The combined adverse effects of policy changes espoused in the 1970s and 80s prompted a research paper comparing the relative importance of systematic and unsystematic FOMC actions on changes in interest rates, with a methodology using event studies and econometric estimation. The MBS market proved hard to track with wide discrepancies in rate changes, and the research, which was abandoned in the last chapters of the cited dissertation, was inconclusive. But going back to the impact of yesterday’s speech, Powell has sent US interest rates once more on an upward trajectory. Looking ahead/speaking systemically, the Board’s current policy was seen as a pre-emptive strike on inflation prompted by the effects of globalization on the US labor markets and workers’ aggregate bargaining power. So it is likely that we will see similar results to the cited early 80s paper in the following months.

4. Implications for Monetary Policy

Having given an outline of the present financial position and the possible utilization of fiscal policy, it is now possible to analyze the likely impact of Mr Powell’s comments on the typical battle against inflation while an asset price bubble is present. Before evaluating the potential implications for inflation, general trust in individual Mr Powell must be examined in great detail. Markets tend to predict a man with potential, a potential change in fiscal policy. Mr Bernanke is a strong researcher and it would be reasonable to expect that his approach towards inflation would be intelligent and well-planned. Initially, it is helpful to take a look at possible strategies that would be deployed to curb a potential bubble and to address the issue of inflation caused by assets. In such a situation, the optimal strategy is to cool the economy, with a general increase in interest rates and a more aggressive fiscal policy will be deployed by raising rates for specific industries to control demand within these areas. This contrasts to the hard-line approach adopted by most policymakers to simply raise rates. This strategy may not be sufficient; however, there is a strong belief that the present-day central bank would want to try to avoid a repetition of the crashes in 2000-01 and 2008-09. This is already promising for inflation prospects given the fact that it has been addressed on numerous occasions that the current economic situation resembles that of the 1930s in which lessons were learned in a positive way and in that the nightmares of the 1930s and the post year 2000 events were not repeated.

5. Conclusion and Future Outlook

Federal Reserve FOMC meetings were always interesting; they had always signaled some sort of turning points in the market. Whether it be a short-term blip or a trend reversal, one would have always been able to have an insight by keeping an eye on the price action before and after the meeting. This June meeting was no different. The rate decision cum statement was already well expected, no change, and a quite obvious hawkish statement to restore confidence in the economy after a rather shocking NFP result. It was last night that I found out an FOMC member had a speaking engagement on the economy today. Always interested in hearing what they think about current economic conditions, I googled the news wires for any detailed info about it. Unfortunately, I was unable to find any evidence of what this member said today. Little did I know, I would later find my answer… at a different source. Earlier this evening, I turned on CNBC and was surprised by what the analysts were saying about the market. They seemed utterly perplexed at the massive selloff in bonds and equities, having been no real news/events during the cash session to have caused this. I knew that the two were linked – the bond market selloff caused the equity market selloff or both markets dropped simultaneously. Given that we had found nothing abnormal in the near-term supply/demand data for bonds, the conclusion was that this was due to technical selling, liquidity concerns, and/or a reaction to something big said in the markets. Now knowing that a lot of small retail investors and some institutional investors use the news as a signal to buy or sell, it was clear that whatever caused this chain reaction had to be recent. From this logic, I deduced that something said in the recent hours must have triggered a chain reaction starting in the bond pits and eventually leading to the selloff in the equity markets. The missing link was *what* had caused this to happen? And it was later this night, the inquisitive mind never giving up on my quest for knowledge, that I would finally answer this unanswered question.