Drew Angerer/Getty Images News
Poor Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System.
No one seems to believe him.
The financial markets see Mr. Powell as a "bluffer."
"The market's big comeback in January is indicative of one thing: Investors don't believe the Federal Reserve is going to keep interest rates high for long."
This from Akane Otani and Nick Timiraos, writing in the Wall Street Journal.
John Grahn, head of exchange-traded funds at Allianz Investment Management, is quoted as saying,
"The markets are calling their bluff."
What has Mr. Powell done to earn the reputation that you can't believe what he is saying?
Well, the one piece of experience investors have is the time period that Mr. Powell was the Fed chair and the Federal Reserve was fighting a possible stock market collapse which could lead to a collapse of the U.S. economy.
At the time of the stock market decline in early 2020 and the Covid-19 recession taking place in the February-April period of that year, Mr. Powell and the Federal Reserve responded aggressively, as they should have, to protect the U.S. financial system and the U.S. economy.
The Federal Reserve began almost immediately to purchase securities and pump liquidity into the banking system. It soon followed with a policy identified as one of quantitative easing, in which the Fed added $120 billion of new securities to its securities portfolio for an extended period of time.
This graph is the picture of how the Fed built up its securities portfolio from early 2020 through to the end of the year 2021.
Securities Held Outright (Federal Reserve)
On Wednesday, January 1, 2020, the Federal Reserve held $3.7 trillion is its securities portfolio.
By the end of 2021, that is on Wednesday, December 29, 2021, the Federal Reserve held $8.3 trillion in its securities portfolio.
Quantitative easing brought $4.6 trillion into the Fed's securities portfolio during this period of time.
Mr. Powell's Attitude
The impression Mr. Powell gave during this period of time is that the most important feeling driving the Fed's efforts to provide liquidity to the financial markets was that the Fed was to err on the side of monetary ease so as to avoid, as much as possible, a financial market collapse.
This feeling is understandable.
Mr. Powell, a lawyer, was leading the most important central bank in the world at a time when it appeared as if the "whole world" could fall apart...that something greater than even the Great Depression, let alone the Great Recession, might take place.
Unfortunately, the investment community seemed to get the idea that Mr. Powell, more than anything else, was acting in a way to protect his name in the history books.
Who wants to be known as the Chairman of the Federal Reserve that oversaw a catastrophe that exceeded the Great Depression?
Well, the U.S. got through this period of time, but the feeling about Mr. Powell has seemingly continued to be held by many in the financial community.
The economy survived, but Mr. Powell and the Federal Reserve created an asset bubble in the process. And, now, the Fed has got to face the consequences of a deflating asset bubble.
What goes up, must come down.
But, why should the thoughts going through Mr. Powell's brain change?
Why should Mr. Powell think any differently on this side of the bubble than he did as he was pumping the asset bubble up?
The Other Side
Where Mr. Powell executed a monetary policy based on quantitative easing in the earlier part of his regime, Mr. Powell is now executing a monetary policy based upon quantitative tightening.
Here are the statistics that show the other side of the curve.
Securities Held Outright (Federal Reserve)
The securities portfolio amount to just over $8.5 trillion at the time the Fed moved into its quantitative tightening.
Right now, the securities portfolio is right around $8.0 trillion, representing a decline of almost $500.0 billion.
The program of quantitative tightening has now been in place for about 10 1/2 months.
Investors' Concern
The investor's concern is that Mr. Powell and the Federal Reserve will not keep on with its policy of quantitative tightening.
The investor's concern is that Mr. Powell and the Federal Reserve, for whatever reason, will "pivot" away from its tightening position and move to one that fights whatever disruption might have occurred.
That is, investor concern seems to feel that Mr. Powell will, once more, err on the side of monetary ease, and when some form of market disturbance occurs, will move so as to prevent a "catastrophe" from occurring.
This is the attitude that the Wall Street Journal writers are attempting to catch in the recent article cited above.
If the Fed does "pivot" then investors want to get into the market as soon as possible in order to take advantage of rising stock prices, something that would result if the Fed does "turn around" and begin to pump money back into the financial system again.
And, investors seem to believe this picture so that they do not want to miss the bottom of the market right now.
The Other Side
Still, others believe that the Fed will not "pivot" and when this is realized, the stock market will head lower for the year.
For example, Mr. Grahn, quoted above, has stated that BNP Paribas analysts believe that the S&P 500 index could fall to as low as 3,400 by year-end. This index is now around 4,136.
So, we are getting numbers all over the place for the stock market this year.
Deutsche Bank "expects the index to climb to around 4,500.
Goldman Sachs thinks the market will finish the year around 4000 not far above where it started this year.
Mr. Grahn sees "a lot of volatility" in the market this year.
This shows that the investment community doesn't really have a very strong narrative for the rest of 2023.
This also shows that the investment community has very mixed feelings about Mr. Powell.
Unfortunately, I don't see that confidence picking up at any time during the year.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
