We are taught fairly early in our lives that our words and tone can make a big difference in the message our listeners hear. As the father of three boys that seem to bicker quite often, I know I have talked about “tone of voice” far more since I became a father than I did before.
Federal Reserve Chairman Jerome Powell may have learned a very important lesson about how his words and tone can have a huge impact on world financial markets. If we flashback to October 3, Powell spoke at an event co-hosted by The Atlantic Magazine and the Aspen Institute. He caused a major stir in the market by saying, “Interest rates are still accommodative, but we’re gradually moving to a place where they’ll be neutral. We may go past neutral. But we’re a long way from neutral at this point, probably.”
I wrote about that speech in an article published on October 5. Essentially the words that he used and the tone of the speech caused the S&P 500 to start a downturn that dropped the index by approximately 10%. You can see on the chart below how stocks tumbled during the stretch following Powell’s comments. October 3 is marked with the first blue arrow.
The second blue arrow marks Chairman Powell’s comments from November 28. This time he was speaking at the Economic Club of New York and he said, “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy. — That is, neither speeding up nor slowing down growth.” The key words in that statement are “just below”.
The comments sent stocks soaring and the S&P gained 2.3% on the day. In fact, all four of the main U.S. indices gained over two percent on Wednesday and the S&P experienced the smallest gain of the four. The Nasdaq gained almost 3% on the day.
In just over a month and a half, Powell changed his words from “we’re a long way from neutral” to “just below the broad range of estimates of the level that would be neutral”.
Several guests and hosts on Bloomberg have called Powell’s comments from early October a rookie mistake, and perhaps it was. It seems like he has been the Fed Chair for a lot longer than he has, but he hasn’t even been in the position for 10 months yet. The folks on Bloomberg have even pointed out that all of the recent Fed Chairs have made rookie mistakes, from Greenspan to Bernanke and most recently Yellen.
What was really interesting was reading the different takeaways regarding whether President Trump’s criticism of Powell had an impact on his comments yesterday. The Washington Post, a left leaning publication, published an article titled, “The Finance 202: Jay Powell isn’t actually folding to Trump pressure.”
Conversely, Fox News is a right leaning media company and published an article titled, “Did Fed’s Powell blink after Trump’s attacks?”
Regardless if you lean to one side of the political spectrum or the other, the fact of the matter is that Chairman Powell did change his words and his tone from early October. It sounds more like the Fed is leaning toward a hike in December and then one more in 2019 and that could be all. That is what sent stocks soaring to their biggest day since March.
Even if this is the case and the Fed is getting ready to slow down with the rate hikes, we still have the trade situation with China that needs to be worked out. Of course, President Trump is supposed to meet with President Xi at the G-20 summit in Argentina this weekend. If there is some positive headway made at that meeting, we could see another boost to stock prices next week.