Central Banks

3 Key Takeaways From the Fed and What They Mean for Investors

Jerome Powell
Credit: Brendan Smialowski/Pool via REUTERS

Yesterday, the Fed’s policy setting committee, the FOMC, concluded their two day meeting, and released a statement detailing their decisions on monetary policy. So, what do we as investors know now that we didn’t necessarily know yesterday, and what does it all mean in terms of investment decisions?

1. This Fed Doesn’t Like Surprises

First and foremost, we know that this is not a Fed that is apt to surprise the market. In the press conference that followed the release, Chair Jay Powell put to bed the idea of hiking rates by 75 basis points, or three quarters of one percent, rather than by the previously suggested 50 basis points. He also indicated that they would start reducing their balance sheet next month, again as previously indicated. This is consistent with the kind of transparency that Powell has strived for in the past, whereby he and other committee members indicate their intentions ahead of time, then stick to that plan.

That is in stark contrast to what the central bank did up until around the time Ben Bernanke took over as Chair. Prior to Bernanke, policy moves were generally kept secret, and changes could produce massive, lasting market swings. More recently, however, they have signaled changes well ahead of time, giving the market time to price in changes before they actually occur.

2. They Believe the Outlook is Still Strong

The first sentence of the official statement was reassuring for investors, probably by design. It said, “Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong.” Obviously, they think that the negative GDP growth of last quarter was just a temporary blip and that there is enough underlying strength in the economy and the job market for them to tighten policy without doing any real harm.

Cynics would point out that this is the same body that, until recently, believed that inflation was transitory, but the humbling experience of admitting that was wrong seems to have made them less inclined to act overzealously in the opposite direction as they reverse course. They believe that they can do enough with gradual moves to bring inflation back to their 2% target, while still maintaining full employment.

3. The Market Liked What It Heard ... For Now

Before yesterday’s announcement, many traders convinced themselves that neither of the above were true. There was a feeling that the FOMC would see inflation as a danger to stability and depart drastically from their previously outlined course. When they didn’t, therefore, a relief rally ensued, and stocks posted some strong gains.

The problem here, though, is that this was a reaction to Jay Powell’s words, and we have yet to see how stocks will react to his actions. In that respect, the rate hike isn’t the most important thing that he talked about yesterday. Higher rates have been priced in for a while, but the Fed reducing their asset holdings could have a lasting effect that isn’t yet fully discounted.

When the Fed buys bonds in the open market, they essentially just create the money to do so, thereby increasing the amount of investable cash in the system.  When they reverse that policy, it will, logically enough, reduce the pool of investable money.

That will probably have a negative impact on the frothier parts of the market such as crypto and some high momentum “meme” type stocks, but it could go beyond that. This is a market that is used to having their pockets filled regularly, and ending that could have a lasting, chilling impact on stocks.

Overall, Powell did what he could to calm the market’s fears, but the fact remains that we are undergoing a major shift in monetary policy, tightening into what is beginning to look like an economy that is weakening. One could argue that isn’t a bad thing as the strength was getting out of hand, but for a while it may pay investors to dial down risk, concentrate on quality names dragged down with everything else, and adopt a “wait and see” approach to more volatile investments for a while.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio