The Fed : 0% Rates for Two Years?
(Thu, 11 Jun 2020). Federal Reserve Board Chairman Jerome Powell confirmed zero rates for a further two years - so why is the stock market recoiling?
Everyone is focusing on the Fed`s `gloomy` economic outlook from last night, but his commitment to the market was incredibly bullish for stocks.
Dow Jones Industrial Average (DJIA) futures plummeted 500 points after ‘gloomy’ Fed comments. Despite a negative economic outlook, chairman Jay Powell’s response was incredibly supportive for the stock market. Commentators say traders might shrug off the ‘down day’ and we’ll see another leg higher afterwards. The stock market took a turn for the worse this morning as traders digest last night’s Federal Reserve statement. Dow Jones Industrial Average (DJIA) futures point to a huge 500 point slide on Thursday.
But why? Powell’s commitment to hold rates at zero for two years and continue QE is mega bullish for assets. CNBC’s Guy Adami said traders might take a day or two for the market to read between the lines.
Dow Futures Plummet 500 Points
In a vicious overnight selloff, Dow futures shed 500 points (1.9%). The correction is perhaps a healthy retrace after a euphoric rally that lured in a wave of retail investor FOMO. S&P 500 futures were down 1.4% and even the unstoppable Nasdaq took a breather, with futures down 1.1% after closing at record highs yesterday.
Powell Delivered Exactly What Investors Wanted
Here are the only words that mattered to stock traders in Powell’s statement last night. "We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates." This is as good as it gets for Federal Reserve commitments. You almost never get a two-year forecast on rates from the Fed chairman himself. It just doesn’t happen.
Even Former Federal Reserve Bank of Atlanta President Dennis Lockhart said he’s rarely seen a central banker so resolutely committed to supporting the markets. There should be no question, he added, that Powell will be there with stimulus when required. That’s as bullish as it gets for the market.
The Stock Market Isn’t The Economy
Most news outlets were quick to jump on Powell’s ‘gloomy’ economic forecast as he admitted that recovery would take a long time. Some traders may initially have panicked at this. Karen Finerman at Metropolitan Capital admitted the economic reading was. But if we’ve learnt one thing since the March selloff, it’s that the stock market isn’t the economy. The stock market is a discounting mechanism that looks to the future. And Powell just delivered a two-year, zero-interest, crystal ball to the financial markets. Whether or not it’s the right policy, CNBC’s Tim Seymour said this is what investors like to see.
Dow Jones Leaders And Laggards
Boeing (NYSE:BA) continues yesterday’s slump, dragging 7% in premarket trading. The renewed threat of a longer ‘return-to-normal’ is hampering travel stocks, airlines, and retailers this morning. Financials also suffered, with Goldman Sachs (NYSE: GS) and JP Morgan Chase (NYSE: JPM) down 3.5% each. Even tech stocks are struggling in today’s selloff. After reaching new all-time highs yesterday, Apple (NASDAQ: AAPL) and Microsoft (NYSE: MSFT) are cooling off, down 1% and 1.5% respectively.
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