Updated March 23, 2023

Powell & Yellen at Odds, but Favorable Conditions Persist

The Federal Reserve met Wednesday to determine its latest interest rate policy. Amidst the recent turbulence in the banking sector, the Fed decided to raise its reference interest rate by  0.25%. This action was widely expected by the market. 

The more interesting aspect was what Fed Chairman, Jerome Powell, would convey to the market during his press conference.

Powell Reassures the Market

Unlike in past meetings where Powell seemed to go out of his way to discourage equities from rallying (because it hurts the Fed’s fight against inflation), yesterday Powell appeared to do the opposite–going out of his way to reassure the market that the banks are stable and the Fed may not have to raise interest rates as high as it initially thought. 

For example, to start the press conference, Powell mentioned that history has shown when there is a crisis of confidence with the banks, bad things can happen. Thus, the Fed’s first priority is to stabilize the banks. He said depositors should assume their deposits are safe. 

He also said that the turmoil in the banking system will tighten economic conditions (as banks won’t lend as much) and that will have the same effect as the Fed raising interest rates. Thus, the banking crisis may result in the Fed not having to raise rates again. 

Yellen Rattles the Market

The market appeared to respond favorably to what Powell said, rising to new intraday highs during his press conference. But sometime in the middle of Powell’s press conference, Treasury Secretary, Janet Yellen, who was testifying in front of Congress on the bank situation, said that the Treasury and Federal Deposit Insurance Corporation were not working on expanding deposit insurance to all uninsured depositors.

The market did not like this statement at all and proceeded to sell off nearly 3% from high to low; closing at the low. Ironically, when the market closes at its low, it tends to have a strong rally over the next 1-3 days and we are witnessing that today. So far today, the market has recovered much of yesterday’s loss. 

Looking ahead, the market is unsure whether the Fed will raise rates again at its May meeting–Fed funds futures are pricing in a 50% chance of a rate increase, a coin flip. 

Our Takeaway 

All in all, the Fed meeting appears to maintain the relatively favorable conditions for equities, gold, and commodities, and the relatively unfavorable conditions for the U.S. dollar—all of which align with Allio’s current investment thesis.

Related Articles