The Fed: Powell Just Napalmed Financial Markets

And the S&P 500 still doesn’t get it. Yet.

Discussion

This will be short. Yesterday and today in front of Congress Fed Chair Jerome Powell:

1. Guided to a higher terminal rate

2. Opened the door to a faster hiking pace (50 bps versus 25) starting on March 22

3. Publicly accepted the historical fact that at least 7% unemployment is required to bring inflation down to 2%

4. And, most critically, guided to a higher long-run neutral rate

And the S&P 500 barely budged.

The stock market is a strange animal. Large institutional investors knew full well in January 2020 that COVID was a big risk to markets, yet the SPX didn’t react until the middle of February. In early 2008, after the US economy had entered recession with credit markets on fire, economically sensitive industrial stocks went vertical. We all know what happened just months later.

It is The WOTE’s suspicion there is a lot of “long-term oriented” lazy stock market money fast asleep while Powell’s napalm barrels toward it.

As always, economic gravity will win in the end.