What’s Behind The Market Reaction To Powell’s Comments On Quantitative Tightening?

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On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Research Analyst Brian Yadao discussed market reaction to the U.S. Federal Reserve (the Fed)’s latest interest-rate increase, the impacts of a potential U.S. government shutdown on markets and volatility projections for 2019.

Markets sink in wake of Powell press conference

In a widely-anticipated move, the Fed announced another interest-rate hike on Dec. 19, raising the benchmark lending rate to a target range of 2.25% to 2.50%. Market reaction was initially fairly muted, but remarks by Chair Jerome Powell during a follow-up press conference quickly sent stocks tumbling. Why?

“Responding to a question about quantitative tightening, Powell said that the Fed’s balance sheet runoff is on autopilot—and that really seemed to spook investors,” Ristuben said, adding that he found the strong reaction somewhat surprising. “Both Powell and former Fed Chair Janet Yellen have previously talked about shrinking the balance sheet (by up to $50 billion a month) in an automatic fashion”, he noted.

Powell’s comments probably touched on a primary issue for markets, Ristuben said: concern that the Fed is striking too hawkish of a tone at a time when the growth of the U.S. economy and corporate earnings appear primed for a slowdown. “At Russell Investments, we anticipate that GDP (gross domestic product) growth rates will slow from roughly 3% this year to closer to 2% in 2019, as the impacts of tax cuts and fiscal stimulus fade.” Earnings growth among U.S. companies, Ristuben believes, will probably lower to somewhere in the single-digits—a big drop from the roughly 25% growth rates observed earlier this year.

“At the end of the day, the market is really struggling over whether or not 2019’s forecasted slowdown will be the start of a recession,” he said, “and that’s made it extra-sensitive to all kinds of news.”

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