THE DOW CAN´T HANDLE THE FED´S TRUTH / BARRON´S MAGAZINE

The Dow Can’t Handle the Fed’s Truth

By Teresa Rivas


Michael Haddad


Told ya so. The Dow initially added to its gains after the Federal Reserve raised rates but the good mood didn’t survive Fed Chief’s Jerome Powell’s press conference. All three major indexes fell, much as we warned they could. In today’s After the Bell we…

…puzzle over the Fed and where things went wrong;


…go a whole post without mentioning tariffs;


…and explain why Alexion Pharmaceuticals soared to the top of the S&P 500.

Post-Fed Flip Flop

Stocks tried to break a two-day losing streak Wednesday but sank in the last hour of trading, following the Fed’s press conference.

The Dow Jones Industrial Average lost 106.93 points, or 0.40%. to 26385.28 while the S&P 500 slid 9.59 points, or 0.33%, to 2905.97 and the Nasdaq Composite fell 17.11 points, or 0.21%, to 7990.37.

It isn’t as if the market was spooked by the long-expected 25-basis-point interest rate hike, which everyone was expecting, and talk of a December increase also was far from a shock. Yes, the Fed has been giving us interest rate increases this year that are “slightly above the market’s original projections,” writes Glenmede’s Jason Pride, but the pace is “justified,” given the strong economy, full employment, and rising inflation. “An additional rate hike may be coming this year, but the economy and markets can handle this pace since policy has yet to truly turn tight,” he adds.

Fair enough. But perhaps it isn’t surprising investors were felling skittish. After all, it was the first time the Fed has raised rates at a September meeting since the cycle began, notes Allianz Investment Management’s Charlie Ripley, and it’s the first time that the fed-funds rate is above core inflation since the crisis.

Moreover, there’s “much less certainty” about what happens after next summer, if the Fed raises interest rates in 25-basis-point increments until it reaches its target date, writes AllianceBernstein’s Eric Winograd. “The Fed’s dot plot illustrates both the near-term consensus and the longer-term uncertainty,” he notes.

So it isn’t surprising, then, that investors were eagerly parsing Powell’s language and the so-called dot plot—the graph that is a visual representation of the Federal Open Market Committee’s economic projections.

UBS’sSeth Carpenter notes that the longer-run median dot plot was revised up to 3%, rather than the downward revision to 2.75% that he expected. The change was the result of just one dot, but on balance, he writes, “the dots show an FOMC that plans to hike past neutral and send the funds rate into modestly restrictive territory.”

More worrisome may have been the removal of the word “accommodative” from the committee’s statement. The committee previously included the word to signal that short-term interest rates were still low enough to be stimulating economic activity. Although committee members have said that the fed-funds rate would move into neutral territory—that is, neither hindering nor helping the economy—and recent robust data shows that the economy doesn’t need the help, some may have hoped that the removal of this language would perhaps also signal a slowing of rate increases. The dot plot showed that wasn’t the case.

Carpenter thought that the Fed would signal the removal this time, waiting until December before actually taking it out, he writes: “We never thought that the removal of the word would imply that hiking would end soon. Removing the word and still having a dot plot that continues to have meaningful overshooting of neutral should put paid to that view of the word.”

Of course, at the press conference Powell dismissed concerns about the language change, going so far as to say that monetary policy is still accommodative. (All things are possible when truth isn’t truth.) His explanation is that the phrase, introduced three years ago, was no longer needed.

In addition, there’s plenty of time between now and 2020, notes Wells Fargo’sJay Bryson. He thinks growth will slow enough “to lead the Fed to reverse itself by cutting rates 25 basis points at the end of 2020.” So while the end of the tightening cycle isn’t over, the language change may signal “the end of the beginning.”

Then there’s another layer to consider: We know growth has to slow, but the idea that it will slow enough by late 2020 to get the Fed to cut rates could also cause investors to fret. Or cheer? No one ever said Goldilocks was easy to please, or maintain.

In the end, there may be plenty of debate about what exactly caused stocks to slide into the close, but at the press conference, Powell also said that given the strength of the U.S. economy, it may be a good time to address the deficit, given the “unsustainable fiscal path” the country is on. No matter how good a party is, no one wants to think about paying the bill.