What investors need to know about a potentially faster Fed taper
Published at : December 05, 2021
CNBC's Steve Liesman joins 'Squawk Box' to discuss key points from Federal Reserve Chair Jerome Powell's appearance in front of the Senate on Tuesday. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi
Stocks are up again on Wednesday, but market experts were not surprised that the Dow Jones Industrial Average tested new lows on Tuesday after Monday’s brief rally, and that was even before Federal Reserve Chair Jerome Powell surprised the market with a more hawkish tone amid the new Covid threat.
Monday’s rally was not made to last: the advance/decline rate (the number of stocks within the market that went up versus down) barely broke the 50% mark, and the winners were all in tech and defensive names rather than broader sector participation. On Tuesday, Apple’s outperformance versus almost everything else in the market suggested a flight to safety among stock investors that was about as close to bond buying as the equities market gets.
The up and down action suggests the market tug of war will continue, and the Fed will now be contributing more to the volatility. So what should investors make of Powell’s hawkish messaging before the Senate, indicating the Fed will discuss accelerating its taper timeline at its mid-December meeting and that the word he has favored on inflation, “transitory” should be retired from usage?
There’s plenty of speculation about why Powell pivoted during a new Covid fear cycle. Was it because Biden announced his reappointment to the Fed chair and he feels more freedom to act? Is he getting ahead of what could be tough confirmation hearings on Capitol Hill? Could Powell be using the omicron variant as an opportunity to send a more hawkish policy message, knowing he can ultimately pull back to a more dovish tone if the Covid scientific data worsens?
What the market knows for now is that Powell’s message on inflation and the potential for an accelerated taper is more hawkish, and if the omicron threat does not turn out to be dire, Powell has moved from the center of the Fed to a position more hawkish members have been stating for months.
There is a risk that the omicron variant intensifies the supply chain issues that the global economy already is experiencing, and the related inflation, which could add pressure on the Fed to act more based on the threat of inflation than a new Covid outbreak it sees the economy as being able to handle. The Fed and Powell are on record as saying the economy has “learned” to live with Covid and each new Covid wave has done less damage to the economy.
“What we’ve seen is with successive waves of Covid over the past year and some months now, there has tended to be less in the way of economic implications from each wave,” Powell said at a press conference that came after a summer two-day meeting of the Federal Open Market Committee. “We’ve kind of learned to live with it, a lot of industries have kind of improvised their way around it,” Powell said.
In his Senate testimony this week, Powell said the omicron variant does potentially complicate the inflation threat, and inflation being sticky may continue to be the main fear of the Fed rather than omicron itself, until proven otherwise.
Experts provided CNBC with a variety of views, both positives and negatives, from Powell’s evolving position on the taper and inflation.
Fed messaging will continue to be volatility issue for stocks
What the markets are experiencing now is a preview of a period of Fed messaging that may continue to add volatility on top of the omicron situation, says David Zervos, chief market strategist at Jefferies.
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Stocks are up again on Wednesday, but market experts were not surprised that the Dow Jones Industrial Average tested new lows on Tuesday after Monday’s brief rally, and that was even before Federal Reserve Chair Jerome Powell surprised the market with a more hawkish tone amid the new Covid threat.
Monday’s rally was not made to last: the advance/decline rate (the number of stocks within the market that went up versus down) barely broke the 50% mark, and the winners were all in tech and defensive names rather than broader sector participation. On Tuesday, Apple’s outperformance versus almost everything else in the market suggested a flight to safety among stock investors that was about as close to bond buying as the equities market gets.
The up and down action suggests the market tug of war will continue, and the Fed will now be contributing more to the volatility. So what should investors make of Powell’s hawkish messaging before the Senate, indicating the Fed will discuss accelerating its taper timeline at its mid-December meeting and that the word he has favored on inflation, “transitory” should be retired from usage?
There’s plenty of speculation about why Powell pivoted during a new Covid fear cycle. Was it because Biden announced his reappointment to the Fed chair and he feels more freedom to act? Is he getting ahead of what could be tough confirmation hearings on Capitol Hill? Could Powell be using the omicron variant as an opportunity to send a more hawkish policy message, knowing he can ultimately pull back to a more dovish tone if the Covid scientific data worsens?
What the market knows for now is that Powell’s message on inflation and the potential for an accelerated taper is more hawkish, and if the omicron threat does not turn out to be dire, Powell has moved from the center of the Fed to a position more hawkish members have been stating for months.
There is a risk that the omicron variant intensifies the supply chain issues that the global economy already is experiencing, and the related inflation, which could add pressure on the Fed to act more based on the threat of inflation than a new Covid outbreak it sees the economy as being able to handle. The Fed and Powell are on record as saying the economy has “learned” to live with Covid and each new Covid wave has done less damage to the economy.
“What we’ve seen is with successive waves of Covid over the past year and some months now, there has tended to be less in the way of economic implications from each wave,” Powell said at a press conference that came after a summer two-day meeting of the Federal Open Market Committee. “We’ve kind of learned to live with it, a lot of industries have kind of improvised their way around it,” Powell said.
In his Senate testimony this week, Powell said the omicron variant does potentially complicate the inflation threat, and inflation being sticky may continue to be the main fear of the Fed rather than omicron itself, until proven otherwise.
Experts provided CNBC with a variety of views, both positives and negatives, from Powell’s evolving position on the taper and inflation.
Fed messaging will continue to be volatility issue for stocks
What the markets are experiencing now is a preview of a period of Fed messaging that may continue to add volatility on top of the omicron situation, says David Zervos, chief market strategist at Jefferies.
» Subscribe to CNBC TV: https://cnb.cx/SubscribeCNBCtelevision
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Turn to CNBC TV for the latest stock market news and analysis. From market futures to live price updates CNBC is the leader in business news worldwide.
The News with Shepard Smith is CNBC’s daily news podcast providing deep, non-partisan coverage and perspective on the day’s most important stories. Available to listen by 8:30pm ET / 5:30pm PT daily beginning September 30: https://www.cnbc.com/2020/09/29/the-news-with-shepard-smith-podcast.html?__source=youtube%7Cshepsmith%7Cpodcast
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