'Plunging into significant recession' is take-home concern from today's grilling of Fed Chairman Powell, and I'm glad it was so candid. While that was clearly elucidated as a risk by several Senators (Kennedy, Brown & Warren), it didn't get much of a response from Chairman Powell, who remained stoic.

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'Soft landing out the window' is another way to look at it, except that none of it delineates the core factors behind inflation, include the Fed's previous 'lower for longer' bias way past the Covid-promulgated 'emergency'. Now a Fed with a 'higher for longer' approach has attention, and nobody likes it. Finally these Senators at least tended to note something I have: that the policy won't do a lot to fight inflation (certainly not dropping it to 2%) while it will harm the most the people the Fed profess to care about. It might sound political, but realistic.

Analysts are trying to get their 'arms around the idea' of a 50 basis point hike. So the probabilities of the Fed 'overdoing it' are raised by today's testimony. If the Fed really does lots more, the risk to the overall economy increases. But it was the comments / questions by Senators asking 'why' the Fed would risk a policy that puts millions of Americans out of Jobs, that was appreciated.

In a sense the Fed can't 'pin' inflation to the mat, no matter how hard they will wrestle price levels, without 'breaking something', and that's been the worry. I also believe it's not just a bullish narrative failing or teetering, because of one reason: the war. The market is not on the 'wrong foot' from all this, it got what was expected from the more dovish Senate Hearing, and likely opposite will it seems reasonable, will be the more hawkish remarks from the House, while of course Powell's prepared statement has to be exactly the same as today's.

In-sum: 

The Federal Reserve is sort of talking 'terminal rate' near 5.5%, but as I've notice, that's what we've been hearing for awhile. But longer is a prospect since a 'pivot' is unlikely, unless there's a major existential event (Taiwan?).

'Recession' likely 'is' the policy of this Fed, they know they can't truly curtail inflation unless they cut it off at the knees as someone said, and that's higher rates for longer. But again the Fed is fighting the Congress and White House, at the same time Government contends they're trying to be frugal. Really the questions from Senators were more responsible than the policies most follow and voted for, but there's nothing more we can say about that.

The Fed is 'trying' to convince the world how tough they're going to remain. At the same time the bond market is trying to resist that argument. Risk exists of course, and now we focus on not so much Jobs, but CPI and PPI and more. It all comes ahead of the 'Ides of March' and an FOMC Meeting thereafter. For now we await 'Day 2' and probably a strong Jobs number that reinforces the strong stance of Chairman Powell.

For the S&P, holding the vicinity of the 50-Day / 200-Day Moving Averages is key, that's why we wanted to view the recent rebound as merely a 'cushion' created to allow the market to digest Powell without some sort of cataclysm. And that's because the linear-thinking algo-driven approaches wouldn't act well at least initially, on a break of that range (after that might set-up a buy).

So the stock market seemingly is more resilient that economic activity implied by the Fed's 'posture'. Why? Wall Street doesn't totally believe the Fed really is able to act as draconian as Powell says, 'come hell or high water' to fight price levels. And that's where it's necessary to fight inflation, but they can't achieve what they want, not just because of political pressure (that too) but the 'war' in a direct and indirect sense, and you may as well include China's emergence.

That (the combination of war and China's economic revival efforts) increases Oil demand. That filters through to pretty much everything as Oil prices rise.

One can argue this is how you get investors into bonds over stocks, and you do have some of that ongoing. Yes there's more risk in this environment with a Fed embarked on a regime of hikes like unseen for years.

It's not the Energy Crisis however, this a pandemic-induced spending spree that is actually settling down, and rebounding now because Spring is coming. So Chairman Powell will 'say' he'll reduce the inflationary impact, but creates a social impact, while he rightly says to Congress 'reduce spending' will also be an explicit way to trim inflation by getting away from profligate spending.

Of course both are correct, and it really takes a combination to achieve what they want and the spending (infrastructure for-instance) is just getting started.

Bottom-line: 

What Powell did today is likely add a Quarter point to what the Fed will do, and the market debates whether the economy can absorb it. So, if the Fed is actually being counter-productive (catch up and front load with the bigger hikes at the start), does matter. So it's a bit iffy, but facts change, and a reactive approach has been seen by the Fed, 'as if' the pricing trend changed.

Higher faster and longer. That's the pitch from Chairman Powell, and markets don't want to fight that, but none of the viewpoints were particularly surprising. The data has been slightly firm (almost 'hot'), and market myopia prevails, but it is unclear if anything will trim the Fed's zeal given the reality of 'breaking' the heart of the economy, or what's left of the so-called middle class. Hence we're not in a social environment that will easily embrace a 4% or higher jobless or unemployment situation, and easier for the Fed to 'theoretically' accept that than to deal with the implications. The ensuing fallout would be life-changing for people and impact politics too.

Soft landing 'rhetoric' is said to be 'dead again', or even 'still dead'. Not to be in the 'landing approaching', but the Fed has notions of getting to levels that's not going to allow economic resilience to persist, and the Fed and media got a bit too excited about all this. Watch and look for some mitigation tomorrow.

Wednesday depends on Powell remarks to a more-hostile House I suspect.

More By This Author:

Market Briefing For Tuesday, Mar. 7
Market Briefing For Monday, Mar. 6
Market Briefing For Thursday, Mar. 2