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Analysts are torn on what Powell’s Fed commentary means for stocks

Scott Gamm
Federal Reserve Chairman Jerome Powell speak at a news conference in Washington, Wednesday, Dec. 19, 2018. The Federal Reserve is raising its key interest rate for the fourth time this year to reflect the U.S. economy's continued strength but signaling that it expects to slow hikes next year. (AP Photo/Susan Walsh)

There’s a bit of confusion in analyst community about what Jerome Powell’s Federal Reserve commentary from Wednesday means for stocks.

Judging from the triple-digit loss in the Dow Jones Industrial Average on Wednesday and subsequent market declines Thursday, the stock market clearly didn’t think the commentary was dovish enough.

Here is why many are disappointed with Powell:

  • He isn’t willing to tame the balance sheet normalization process.

  • He kept the phrase “gradual increases” in the Fed’s statement.

  • Even though the 2019 rate hike forecast was downgraded to two hikes from three, some view two hikes as more than the economy can handle.

  • Worry that Powell is keeping the Fed’s policy on autopilot instead of truly being data dependent

Yahoo Finance tapped two top Federal Reserve and Wall Street pros to help investors guide their decision-making in the final trading sessions of 2018.

Kristina Hooper, chief global market strategist at Invesco:

“There’s not a lot in the way of catalysts that can move stocks upward —unless we get a surprise announcement that the U.S. and China have reached a comprehensive trade deal which is very unlikely. Going forward it’s going to be about other Fed officials in coming weeks trying to refine what Chair Powell said in his press conference and to try to make investors more confident in the Fed’s ability to be data dependent. It looks like a very good buying opportunity for stocks at this juncture — doesn’t mean stocks can’t go down — but this is an attractive entry point particularly for emerging markets as we look to a dovish Fed (two rate hikes in 2019 instead of three is dovish).”

Danielle DiMartino Booth, a former Federal Reserve advisor, author of Fed Up and CEO of Quill Intelligence:

“Read the 2012 transcripts. Powell was skeptical of quantitative easing (QE) back then and focused on an exit strategy in exchange for agreeing to vote for the last round of QE. During the [Wednesday] press conference, he validated markets’ worst fears by reiterating what he’s said all along — that the balance sheet was not up for negotiation. The whispers on the Street were for him to halve quantitative tightening from $50 billion to $25 billion a month. Powell’s insistence that the economy is still on firm footing and his adamance that the balance sheet is not up discussion sent stocks careening. If there’s one thing investors are not accustomed to, it’s being disappointed by the Fed. But that’s exactly what they got.”

By the way, in those September 2012 transcripts, Fed officials were voting on another round of quantitative easing — referred to as Alternative B. Here’s what Powell, then a governor, had to say:

"I’m supporting alternative B with a certain lack of enthusiasm, and I am somewhat uncomfortable with the road that we are on.”

So, it’s no surprise Powell is intent on cleaning up the remnants of quantitative easing.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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