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FED POLICY 

I have read the text of Powell's interview. His comments are consistent with remarks he has made over the past two years during the Fed's current campaign to see interest rates returned to a higher, more historically normal level...

“I think instinctively – I can't prove this, we're going to learn about this empirically – but it seems to me that the neutral rate is probably higher than it was during the intra-crisis period. And so, rates will be higher."

Powell was very clear about being unclear with respect to any expected changes in Fed policy...

“I'm not going to be sending any signals one way or the other on any particular meeting, just to ruin the fun right at the beginning,” In addition, Powell stressed that the decisions are made on a meeting-by-meeting basis and that evolving data can and does change at any time.

These latest comments reinforce what Powell indicated in his testimony before the United States Congress last week and confirm that he is not confident yet that the downward trend toward the Fed's 2% inflation target can be maintained.

Does this mean that any rate cuts are off the table for this year? No, not at all.  It does, however, point up the stubborn, over-optimistic attitude by investors and the media that a rate cut is imminent this year. That may still happen, but, investors could do better for themselves by considering what comes after an initial rate cut.

In other words, it is possible that a rate cut this year, if it happens, might be more symbolic in nature than anything fundamental as far as changes in the direction of interest rate policy are concerned.

FINANCIAL MARKETS 

Stock investors are literally banking on a cut in interest rates. They assume the initial cut to be a watershed event and have projected the change in direction to open up new worlds; or, at least, revive the old one. For their sake, I hope they are right. A wave of disappointment could unleash a torrent of selling.

The risk of a sell-off in stocks is exacerbated by the rapidly weakening economy and the fragility of the banking system. These fundamental risks compound and amplify any threats to investors.

Mathematics makes bond prices consistent with current interest rates. A huge sell-off in bonds is still a potential risk for another reason, though. That risk is a function of credit quality. Slowing economic activity would have serious repercussions for companies that finance their operations with debt. The most vulnerable are low-grade (junk) bonds. If the effects of inflation worsen rapidly to any substantial degree, then longer-term interest rates would likely rise. That would affect all bonds, including Treasuries.

CONCLUSION 

In the world of interest rates, "higher for longer" is still the theme. Stocks (especially) and bonds are both fraught with risk at current levels. 

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