If there is one thing that causes stock market disruption, it is uncertainty. Even so, Federal Reserve Chairman Jerome Powell used that dirty word a total four times in his December 19 news conference after the Fed’s most recent rate hike.
“I think from this point forward, we’re going to be letting the data speak to us,” said Powell. “So there’s a fairly high degree of uncertainty about both the path and the ultimate destination of any further increases.”
In essence, Powell is describing a new Federal Reserve policy of basing further rate hike decisions on the most up-to-date data available. In recent years, the Fed has had a habit of telegraphing an upcoming hike weeks or months in advance and allowing the markets to prepare for the news. With this new policy, surprises may become the new norm. The expected result may be be a downturn in the stock market before FOMC meetings as investors hedge their bets and brace for possible negative headwinds.
The good news from the most recent Open Market Committee meeting was that rate hikes are, in all likelihood, slowing down. The Fed released an updated forecast set that showed an expected two rate hikes this year, after four in 2018. However, Powell stated that the forecast doesn’t represent an “ironclad” plan, by any means.
“Where we are right now is the lower end of neutral,” said Powell, “but there are implications to that.”
By neutral, Powell means simply that the Fed is operating at a rate that is in purpose to neither support nor hinder economic growth.
The chairman sent some mixed signals, however, in stating that “monetary policymaking is a forward-looking exercise,” which stands in relative contrast to his stated policy of letting the “data speak” to the committee and basing decisions on the most recent economic data. Communication will become the new norm in 2019, with Powell’s announcement of news conferences following every FOMC meeting. It’s become clear that the Fed, who are the captains of our economic ship, are operating in a low visibility environment, and will be making decisions based on what’s right in front of them. Powell referred to the current situation in front of the Fed as “walking through a dark room.”
““I have people in my building who are just furious about this,” said Carl Tannenbaum, who is the chief economist at Northern Trust. “The problem is, the Fed can’t just sit there in the dark. The Fed has to make an effort to shed light on what’s going on.”
In a market operating on uncertainty, investors will be reactionary to any Fed statements. If the Fed is operating in reaction to the markets, who is to say where monetary policy will be going into 2020? In all likelihood, if we see some form of trade war resolution in the first quarter of 2019, the markets will see a substantial recovery. When coupled with a “neutral” rate, our economic ship should be largely back on track, but face rough waters with each FOMC meeting.