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Where’d you go, good old Uncle Jay?
That’s what Wall Street was left asking after Federal Reserve Chair Jerome Powell threw markets for a loop with his post-Federal Open Market Committee (FOMC) meeting remarks last week.
The more important question, though, is, what does this “Powell Pivot” mean to you? At the risk of giving away the store too early, I’ll say, “Not much.”
Powell spent the better part of the last couple years pledging to keep interest rates low and money-printing activity high. He’s also continually reinforced the notion the Fed would do so for a long, long time — at least until 2023, perhaps beyond.
After last week’s meeting, Powell took a different tack. No, he and his fellow policymakers didn’t hike rates. No, they didn’t dial back their current $120 billion-per-month pace of bond-buying.
But they did release forecasts for growth, inflation and the future path of rates that were more aggressive than we’ve seen in a while.
Powell also struck a much more optimistic tone on the economy and employment at his post-meeting press conference. He added that policymakers were now “talking about talking about” tapering quantitative easing (QE) at some point down the road.
That’s not exactly “tough” talk, of course, but it did get Wall Street’s attention. And indeed, the market reaction was swift.
Precious metals dropped. The U.S. dollar spiked. Short-term interest rates jumped while long-term rates barely budged, “flattening” the yield curve. Leadership in the stock market also shifted, with safer, yield-oriented sectors like utilities outperforming and cyclical sectors like materials underperforming.
But, as soon as Monday morning rolled around, markets began backtracking on the previous week’s mini-panic. Stocks soared, metals bounced and volatility fell anew.
One catalyst: New York Fed President John Williams refuted the notion the Fed would dial back its easy money drip anytime soon.
In his virtual-public appearance, Williams added, “We’ve made some progress for sure ... but from my perspective, we are quite a ways off from achieving my interpretation of substantial further progress.”
Not long after, Powell himself sought to quell the volatility. He did so by releasing sanguine, steady-as-she-goes comments ahead of his economic testimony before Congress.
Look, I’ve been following the interest rate markets and Fed policymaking process closely for a quarter-century now. I’ve seen plenty of significant shifts during those years. And in the past, I’ve advised making radical portfolio adjustments as a result.
But this so-called pivot? Nope. The Fed is merely tinkering around the edges with its messaging rather than signaling a wholesale shift.
In other words, stay focused on the same successful “Safe Money” investing strategies I’ve advocated for some time. Don’t lose your way just because of a few days of Fed-fueled silliness.
If anything, the reaction in the interest rate markets post-Fed makes it even more important to target higher-rated, income-generating investments. They look even more attractive when long-term yields stall out or start falling ... which is exactly what we’ve seen happen the past several days.
And rest assured, when it’s time to make major strategic changes, I’ll let you know.
Until next time,
Mike Larson
