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Fed Chair Powell's Wait & See Monetary Approach Is Bullish For Stocks

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The Federal Reserve showed an intentional lack of clarity in its post-meeting statements Wednesday afternoon (1/26), with a significant emphasis on the flexibility of its monetary policy approach throughout 2022, which Chair Powell explained was impossible to predict at this time.

The initial policy statement pointed to the end of asset purchases by early March and ensured that it would adjust monetary policy as appropriate, which took some overlyhawkish concerns off the table. The FOMC statement highlighted its focus on its benchmark Fed Funds rate as its primary weapon against inflation (aka method of adjusting its policy stance), opposed to an immediate balance sheet reduction.

There was no mention of an anticipated balance sheet shrinking strategy in this afternoon release, with Powell asserting that balance sheet reduction tactic conversations haven’t even begun. He made sure to clarify that the Fed does not intend to begin its asset roll off until after the market has adjusted to liftoff (initial rate hike). Investors wanted to see some definitive strategy regarding asset run off, with the Fed holding an incomprehensible $9 trillion in primarily fixed income assets.

Jerome Powell stuck to his largely dovish guns, while holding on to that hawkish flexibility necessary to maintain credibility. Still, he was steadfast on his stance that their will be a natural inflation abatement as COVID subsides and supply side issues wane.

Powell acknowledged that bottlenecks and supply chain issues have been longer and more widespread than expected, and recognized the long-term risks of sustained wage growth. Omicron-variant has had a prolonged impact on pricing pressure as it weighed on staffing, but he concluded that the latest pandemic strain is running its course much quicker than prior waves. Powell alluded to the notion that the COVID pricing pressures should begin to recede this year.

The real challenge that the Fed is faced with here is navigating this reversion to normalizing raising rates at a pace that would help calm the outsized inflation, but not inhibit the thriving US economy and the exceptionally healthy labor market.  

Powell may have left investors more uncertain about monetary policy after this meeting than before. The Fed Chair’s nimble dance around the Fed’s 2022 plan will only shift as economic data does. Jerome is clearly waiting for his natural inflation deceleration theory to come to fruition, which it almost certainly will. The question is when?

The US’s economic recovery is accelerating in the face of the latest (highly-contagious but less severe) Omicron-variant, with the final quarter of 2021 illustrating 6.9% GDP growth, miles above the consensus 5.5% estimate, and now Jerome is saying that 2022 GDP growth will likely come in above the Fed’s 4% expectation.

Powell knows how devastating a monetary shock would be for not only the stock market but for consumer sentiment, which he needs to keep buoyant to avoid a double-dip recession.

The Fed does not want to interrupt this healthy economic growth by flooding the securities market with fresh higher rate bonds while pulling cash supply (aka reducing its balance sheet). Investors should have been thrilled to hear these market accommodating inclinations throughout his press conference on Wednesday, but the immediate reaction was muted by Powell's monetary uncertainty.

The market slid as much as 3% while the Fed Chair was at the podium, luckily those trusty correction buyers made sure the S&P 500 closed safely above that -10% decline mark.

In fact, in all three of this week’s trading sessions the S&P 500 dropped into correction territory intraday only to close above that threshold each time. It would seem that many market participants are calling for a bottom to this garden variety correction at the most predictable level imaginable.

The near-term bottom may have been solidified market following Jerome’s steadfast stance on a natural deceleration in pricing pressures as COVID’s economic symptoms wane (wait and see policy approach).

Many equities (specifically in oversold growth areas of the market) are itching to push higher with a healthy economic recovery in full swing (6.9% GDP growth in Q4) aided by an overly accommodating Fed, while strengthening quarterly results adds that extra hint of a bottom to the air.

My Top Picks for 2022: CrowdStrike (CRWD - Free Report) , Splunk (SPLK - Free Report) , Alaskan Air (ALK - Free Report) , Uber (UBER - Free Report) , SoFi (SOFI - Free Report) , ACM Research (ACMR - Free Report) , SMART Global (SGH - Free Report) , Taiwan Semi (TSM - Free Report) and Goldman Sachs (GS - Free Report) .

Good Luck Out There!

Dan

Equity Strategist & Manager of the Headline Trader Portfolio service at Zacks Investment Research

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