Powell’s Comments Suggest Dovish Turn

Posted on November 29, 2018 by Gemmer Asset

image_printPrintable Version

Chairman Jerome Powell spoke today at the Economic Club of New York and his comments generally surprised markets in that they seemed to suggest current interest rates may be close to neutral. This is a stark contrast from Powell’s October 3rd statement where he said “…we may go past neutral. But we’re a long way from neutral at this point, probably.” At the time, this was interpreted to mean that markets should expect a steady path or rate hikes over the next few years. And it was this comment that proved to be the catalyst that sparked a selloff in equities as you can see below.

 

 

Today Powell took a decidedly different tone. Here’s the part in today’s speech that is getting all the attention (emphasis is our own):

 

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy–that is, neither speeding up nor slowing down growth.”

 

Essentially this means that if current rates are close to what policy makers believe is a neutral level, the Fed may not hike as much as was previously expected. Said differently, Chairman Powell, like his predecessors, will be data dependent and likely sensitive to signs of a slowing economy, lack of meaningful inflation, a labor market at full employment etc.

 

It Was a “Risk On” Type of Day

 

Global equities rallied on this dovish shift and after a fair amount of volatility post-speech, bond yields closed out the day relatively unchanged with the 2-year bond down -2bps and the 10-year closing flat.

 

Here’s how the major asset classes reacted to today’s comments:

 

 

The asset classes that have been hit the most since the beginning of October were the ones that rallied the most today – i.e. technology, small cap and emerging market stocks. If the prior two months have been “risk off,” today was certainly a complete reversal of that dynamic where the more volatile asset classes outperformed – it was indeed “risk on.”

 

What Does This Mean for 2019?

 

Powell’s comments didn’t change the market’s opinion about a potential rate hike in December – the odds of a 25bps increase still stand around 80%. And while the odds of a hike in March did decrease a bit, it wasn’t drastic. The debate centers around what the rest of 2019 will bring.

 

 

Prior to today there were really two schools of thought regarding policy in 2019. One camp thought the Fed would raise rates more aggressively in an attempt to tame inflationary pressures from an overheating economy. Most on this side thought the Fed would hike 4 or so times next year. The other camp thought there was a good chance of the Fed being more cautious – say one or two hikes. After today’s news, the market is pricing in only one hike for 2019 – a clear win for camp two…

 

 

We’ll get new “dots” via the Fed’s updated economic projections after the December 19th meeting (the ones above are from September). Given today’s comments and the wide discrepancy between where the Fed and the market see the future Funds Rate, it seems likely the FOMC will lower their “dots” to a level closer to the market’s expectations.

 

There are a series of events over the next few weeks (including the release of the FOMC meeting minutes tomorrow) where members of the committee will be making public comments. Will this Fed speak add further clarification to Powell’s comments? We’ll have to wait and see.

 

 

 

 

 

Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.

 

Categories:

Bookmark and Share