Jerome Powell and The Power of Words

Maybe you missed it, but Federal Reserve Chair Jerome Powell this week dropped the “f-bomb” in public.

While giving a speech Thursday at a panel hosted by the International Monetary Fund (IMF), protestors upset about climate change noisily interrupted Powell. As the protestors were being escorted out of the room by security guards, the ordinarily mild-mannered Fed chair turned to an aide and barked: “Just close the f***ing door.”

But Powell doesn’t need to swear to make a big impact. Indeed, he sent the stock market reeling when he signaled another Federal Open Market Committee (FOMC) rate hike may be coming.

In his speech at the IMF confab Thursday in Washington, DC, Powell said that, although he and the other Fed heads are encouraged by inflation’s decline, the central bank’s tightening campaign may not be over just yet.

“The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time; we are not confident that we have achieved such a stance,” Powell said.

In its most recent reading (for September), the core personal consumption expenditures (PCE) price index stood at an annualized rate of 3.7%. That’s a significant drop from the 5.4% peak the core PCE racked up in February 2022. However, the Fed is strictly adhering to its inflation target rate of 2%.

“My colleagues and I are gratified by this progress but expect that the process of getting inflation sustainably down to 2% has a long way to go,” Powell said. “We will keep at this until we succeed.”

In other words, contrary to Wall Street’s recent hopes, rates might be higher for longer.

Powell went on to add: “If it becomes appropriate to tighten policy further, we will not hesitate to do so. We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening…Going forward, it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand.”

Before Powell’s remarks, stocks were trading sharply higher on Thursday afternoon, As he spoke, you could see stocks reverse direction in real time. Equities closed deeply in the red, with the Dow Jones Industrial Average shedding more than 220 points.

The good news is that stocks rebounded Friday, as investors shrugged off Powell’s characteristically downbeat utterances and bond yields stabilized. The main U.S. stock market indices closed sharply higher as follows:

  • DJIA: +1.15%
  • S&P 500: +1.56%
  • NASDAQ: +2.05%
  • Russell 2000: +1.07%

Stocks capped off a winning week. The economy remains in “Goldilocks” mode, which supersedes (for now) uncertainty about the Fed’s next rate decision.

Read This Story: What’s The Formula for a Rally?

Before Powell threw cold water on the financial markets, Wall Street had been betting that the FOMC would continue “pausing” and then actually cut rates sometime in mid-2024. All eyes are now on the next FOMC meeting, scheduled for December 12-13.

Fear and stress have crept back into the markets, as evidenced by the recent uptick in the CBOE Volatility Index (VIX):

As we’ve witnessed many times, Powell’s remarks have an uncanny ability to talk down the stock market.

A recent study revealed that market volatility is three times higher during press conferences held by Powell than those that were held by his three predecessors: Janet Yellen, Ben Bernanke, and Alan Greenspan.

The study’s researchers delved into the transcripts of Powell’s speeches, meticulously comparing them to the public addresses of his predecessors. What they discovered was a striking difference in tone and impact. Powell’s words carried a hawkish undertone, an implicit warning about economic risks.

Powell’s remarks have triggered more pronounced market reactions than those of Yellen, Bernanke, and Greenspan. It’s not merely a matter of policy differences; it’s also a matter of communication style.

Yellen, with her measured and cautious approach, had a knack for soothing market anxieties. The professorial Bernanke, during the 2008 financial crisis, struck a balance in his speeches, instilling confidence without downplaying challenges. Greenspan offered opaque commentary to give the Fed wiggle room when deciding what to do with rates. Powell, however, leans toward a more overtly hawkish stance.

The Federal Reserve has found itself in the awkward position of not just managing monetary policy but also carefully calibrating the psychological impact of its leader’s words on the market.

Powell’s press conferences and public speeches have become nail-biting, high-stakes events, with the potential to sway billions of dollars within the span of a few sentences.

And this week, Powell closed the f***ing door on an early Fed pivot.

Editor’s Note: Spooked by market volatility? For market-thumping gains with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Want to get aboard “The Next Chevron?” Click here for details.

John Persinos is the editorial director of Investing Daily.

To subscribe to John’s video channel, click this icon: