Fed Chair Jerome Powell: Santa or Scrooge?

After the two-day December meeting of the FOMC ended yesterday, the statement that was released and the comments by Fed Chair Jerome Powell had a consistent tone of cautious optimism. His words were such a gift to traders that despite the lack of a long white beard and red suit, it seemed as if Powell, after an extended period of being the “bah, humbug” guy when faced with the childlike excitement and optimism of the market had given in and started playing Santa Claus.

As I said, there was a distinct note of caution, but central bankers always talk in a cautious way. That is by both nature and design. They don’t want to cause ripples in either direction, so the differences in the language they use are usually small and subtle. In that sense, yesterday’s words were quite a departure from what we have seen before. Up until now, as the market has been anticipating rate cuts early next year, the FOMC has stayed focused on whether or not they would need to raise rates even higher to combat inflation. Yesterday, though, Powell seemed to acknowledge that rate cuts not forced by a recession were a possibility.

That is a big deal.

It would be the “soft landing” -- the Holy Grail of rate-hiking central banks -- just enough tightening to slow things down, but not so much as to cause a problem. Little surprise then that stocks jumped after the release of the decision and statement, then continued higher as Powell spoke. While he did say in effect that data would drive future decisions and that another hike wasn’t off the table, he did not dismiss the idea of a cut as he has in the past. So, if anything, the surprise was that by the end of the day, the S&P 500 had gained “only” 1.4%.

The reason for that relatively muted response was the only sour note in yesterday’s action. Faced with a gift from Santa Powell, the market responded like someone would who already knew what they were getting for Christmas. They tried to be appreciative but were basically underwhelmed. Again, that is not really a shock given that both the bond and stock markets have known for months now what Powell seems to have just realized, that it could be that he will be responsible for handling one of the most successful policy turnarounds in history.

I don’t want to be the holiday party pooper, but there is a potential problem here. Whenever markets price in perfection, which is what they are doing right now, there is the potential for disaster. Even a small miss of expectations can prompt a rush to exit what will have become a crowded trade. That can exaggerate the retracement to the point of a crash, even though what prompted it was a small, probably temporary setback.

The good news, though, is that all the data that we have seen in the last few weeks, up to and including this morning’s jobless claims, consumer spending, and import prices, suggest that we are indeed seeing a Christmas miracle unfold right before our eyes. Combined, the three reports released this morning added more color to a picture already drawn, of a strong jobs market contributing to consumer robustness, even as prices fall. That would be a remarkable thing at any time, but coming as it is after an unprecedented jump in rates from zero, it is not too much of a strength to call it a miracle.

One could argue that none of that is actually Powell’s doing. He simply did what had to be done and the incredibly resilient and dynamic U.S. economy took care of the rest. Even if you look at it like that, though, it means that the Fed Chair’s assessment that inflation was always transitory, something for which he received a lot of flack for a while, was actually spot on. So, on the assumption that holiday spending continues as it has started, there is no reason why Jay Powell can’t continue spreading cheer and emerge as the hero of this Christmas story.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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