Jerome Powell (Fed) does not reassure the financial markets

At the end of the press conference on Wednesday evening, Jerome Powell, chairman of the Fed, could see that he had not convinced the markets, the Dow Jones index ended the session in the red while it had progressed after the publication of the press release index which has marked the two-day meeting of the Fed’s monetary policy committee (FOMC).

A few hours later, Asian markets also stalled. The Tokyo Stock Exchange fell 3.11%. Chinese equity markets also closed in the red (Shanghai -1.78% and Hong Kong -1.99%). Europe has fallen sharply in early trading: Paris by 0.66%, Frankfurt by 1.35% and Milan by 0.65%. London held up better (-0.02%).

The tone deemed restrictive by the Fed pushed US government bond yields higher, the 10-year one was above 1.83%, the highest since January 2020, like the 2-year one, at 1.1862%. The dollar, for its part, appreciated particularly against the euro and the pound.

“The economy is in full swing, the spread of inflation is clearly visible and the pressures on supply chains are still there. After spending too long in a transitional inflation scenario, Powell is trying to recover without being swayed by the noise. environmental: geopolitics, omicron impact, decline in stock markets.

But one thing is certain: the monetary adjustment cycle will be faster than in previous episodes because the underlying economic fundamentals are also more robust. “comments Ronan Blanc, analyst manager of Financière Arbevel.

Inflation, the unknown in the equation to be solved

C’est bien ce rythme d’ajustement de la politique monétaire qui est inconnue de l’équation à résoudre pour la Fed afin de calmer une hausse de prix dont hier soir Jerome Powell concédait qu’elle pourrait s’avérer plus difficile à master.

“Inflation remains the main risk to the markets. If the Fed gets it wrong that it begins to moderate in 2022, it will be forced to accelerate policy tightening, even if that will prove disruptive to investors. Asset prices, and hence. for investors “.explains James McCann, an economist at abrdn.

Because there were no surprises on the ads. The statement reaffirmed the principle of an initial hike in key rates – today from 0% to 0.25% – probably in March, at the end of the asset purchase program and at the beginning of the Fed’s balance sheet relief ( 9 trillion dollars), which has doubled since March 2020, with the onset of the Covid-19 pandemic. However, the timetable remains to be known, which the Fed boss was careful not to set during the interrogation session.

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Always betting on a reduction of bottlenecks in the supply chains that continue to weigh on the supply of products, especially energy – yesterday the Brent oil barrel exceeded the 90 dollar threshold – and food, also recognizes that the movement will require more time than expected and which is beginning to have an important social and political dimension for American businesses and families.

“We understand the challenges that high inflation poses to individuals and families, particularly those with limited means to absorb the higher prices for essential goods such as food and transportation.”assured Jerome Powell yesterday.

However, does this mean that the number of rate hikes will be greater than the Fed’s three predicted? Nothing is less certain, according to the Fed chairman who above all wanted to show pragmatism and caution.

No explicit guidelines on interest rate policy “

“This does not mean that in the foreseeable future the Fed will tighten its monetary policy at every meeting. Powell also said that the policy will have to be” agile “, very dependent on the evolution of the economic situation, warns Willem Verhagen, Senior Multi-Asset Economist. at NN IP.

He also said that this reliance on indicators is a two-way street – the Fed could just as easily be more offensive than dovish than it currently predicts. In other words, for the first time in years, it does not provide explicit guidance on its interest rate policy, continues the economist.

However, it is a key tool of monetary policy, especially when we know that the key rate will stay around 0% for some time. This lack of guidance actually reflects the very uncertain environment in which the Fed and the markets operate. If inflation remains high in the second half and wages continue to rise, the Fed may have to raise rates at every meeting and a 50 basis point hike is not out of the question. “concludes Willem Verhagen, Senior Multi-Asset Economist at NN IP.