U.S. Markets open in 6 hrs 15 mins

Will Jay Powell Give the Market What It Wants?

Motley Fool Staff, The Motley Fool

Federal Reserve Chair Jay Powell is set to deliver comments ahead of this week's conference in Jackson Hole, Wyoming. In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss what the market wants to hear and what it could mean for investors.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

More From The Motley Fool

This video was recorded on Aug. 19, 2019.

Jason Moser: Let's switch to something maybe a little bit more cheerful, I guess, cheerful in the sense that Jackson Hole is a really nice place. You can just imagine yourself in Jackson Hole. Now, imagine yourself in Jackson Hole, you're not skiing, but rather you're going to the Jackson Hole economic policy symposium. That sounds like a vacation right there, Matt.

On Thursday, the Federal Reserve chief Jerome Powell will deliver the opening remarks at the Jackson Hole economic policy symposium. The reason why we're talking about this today, there are some analysts out there that say that Powell needs to get out in front of the recent market volatility, the inverted yield curve, all of this stuff, and explicitly address these issues and how he plans to address and deal with them going forward. If he doesn't, then the markets are likely to react, more than likely overreact, in a very negative way.

Talk to our listeners about Jackson Hole and where you stand on how much he needs to be saying about this stuff anyway.

Matt Frankel: Basically, what investors want to hear is that the rate cut that happened isn't just a one-time thing or a wait-and-see approach. They want to see that this is the first step in a series of rate cuts. To give you some of the figures, I just checked, CME has a thing called the Fed Watch Tool that is based on the futures markets and calculates the percentage chance of certain rate actions. Right now, the market is expecting one rate cut in September, another one in October, and yet another in December. The most popular estimate by the end of the year is three rate cuts from here. That's what the market wants. The reason the market reacted negatively after the recent rate cut, even though they got the cut they wanted, was because Powell essentially made it sound like this was going to be a midcycle correction. And what investors really want to see is, "No, this is not just a midcycle thing. This is starting a new cycle of rate cuts that's going to last for a little while and keep rates low for the foreseeable future in order to keep the expansion going." That's what it's all about. Investors want to see that the Fed is doing everything in its power to keep the economic expansion going. The market action of the past week or so, especially with the yield curve inverting the way it did, bond yields are just plunging, the two-year and 10-year inverted for the first time since 2007, and we all know what happened right after 2007. So, basically, the market wants him to address that, talk about the recent market volatility, and indicate that the Fed is going to do everything in their power to keep the expansion going.

Moser: So, just reassurance. They want reassurance. I guess that's fine. Everybody wants a little reassurance in their life. Maybe this is the opportunity for Powell to offer that. But it really feels like we're painting ourselves into a corner with this interest rate policy. You get those things as low as they are and you've got no other levers to pull if we run into a buzz saw. It feels like they can only cut rates so much. Is quantitative easing something we should be expecting here in the next couple of years? I know we said this is all wrapping up and we're getting ourselves out of this, but it seems like they could just decide at the drop of a hat to do it again.

Frankel: I mentioned a few weeks ago -- I have a very unpopular opinion on this. My opinion is that the Fed should never have cut rates at all. I don't think the economic data supported it as much as everyone else seems to think. I'm not panicking. If the market wants to panic because the Fed's not cutting rates, great. I want them to save as much ammo as they can for when things start to get bad.

Moser: Yeah. I mean, things seem pretty good right now. If you look at the general data, unemployment is obviously in a very good place. Consumers are definitely spending. Energy prices, low. Inflation, virtually nonexistent. It's actually a pretty great time to be a consumer.

Frankel: Yeah. The fact that inflation is nonexistent is really the only significant argument, in my mind, to be made for cutting rates. Usually, you raise rates when inflation starts getting out of control. That hasn't happened. So, inflation is really low. And I get that to some extent. I would understand a rate cut based on inflation if other economic signs were pointing toward a slowdown, a recession, unemployment was ticking up, anything like that. But we're just not seeing it. I personally am not a fan of them starting to cut rates. As you said, it reduces the ammo the Fed has in the case that they need to use it. That's where you get into quantitative easing and things like that. So, no, I don't think quantitative easing should be a part of the conversation right now, despite what the president seems to think. Shortly before we recorded this, he just said the Fed should cut by a full percentage point and implement some sort of quantitative easing.

Moser: [laughs] I saw that. That's just a bit much, isn't it?

Frankel: The stock market would love it. I would expect the market to soar by 1,000 points if that actually happened.

Moser: I think maybe that's his negotiating bent. He's thinking, cut by a full point, introduce quantitative easing, and then he's thinking, maybe if I say cut by a point, maybe I get a half a point, and maybe I get a little quantitative easing, as opposed to a lot. Maybe that's the negotiator in him. I don't know.

Frankel: Yeah, it just seems like a lofty starting point.

Moser: [laughs] Yeah. We'll be watching Thursday for any comments that come out of Jackson Hole. If it's anything material, we will certainly revisit next week.

Jason Moser has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CME. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com