Talk ‘till you drop: Fed speaks, markets listens

Stocks traded higher yesterday on dovish Fed remarks. Dovish in this case was a call for a smaller rate hike which shows that investors are grasping for any positive news when it comes to the Fed.

Fed vs Feed. I have written endlessly about what seems like the endless parade of Fed FOMC members hurling hawkish comments at the news feeds. Most of those comments have caused markets to pullback and futures to readjust expectations for rates. Now, of course, none of us, me included, want to see stocks fall, but I also think that it is important for the markets to be aligned with… you know, those fun loving, gray suit wearing, bad hairdo owning, economics loving bankers that make up the Fed. They are, after all, the people who make policy.

Amongst those policymakers are some rising personalities. One name which seems to make it into my blog often is James Bullard, the St. Louis Fed Chief Executive Officer. He seems to have a knack for knocking the equity market on its ear on low-volume Fridays. Now, I am sure that he doesn’t wake up and announce over his runny-eggs breakfast “family, today I am going to cause the stock market to drop… pass me the salt.” No, James is an accomplished economist with a PhD in Economics from Indiana University and an undergraduate degree in Economics. He knows the inner workings of the Fed really well as he has worked there for his entire professional career, working his way up through the ranks. He is also known as being the most hawkish of all FOMC members. His comments are almost always going to push the limits of what a Fed member is permitted to say in public. In other words, you will never hear him use the word “hell” or “handbasket”, but you will certainly here him say things like “50 basis-point hike”, “higher rates necessary”, and even posit a terminal rate of 5 3/8 %. He is allowed to do that, and you can see his projections right on the Fed’s website.

On the other side of the bird spectrum, I have written about Raphael Bostic, the CEO of Atlanta Fed. He took over the top job from Dennis Lockhart several years ago. This Harvard and Stanford educated PhD knows his stuff when it comes to economics. He has been around the banking and finance policy scene for his entire professional career. He, is known as one of the more dovish FOMC members, often touting a more tempered pace of tightening. Now, he is not the most dovish. That distinction was held by Lael Brainard, the Vice Chair of the Fed up until a few weeks ago. She was the most vocal dove on the FOMC, and she held an important role as vice chair. She just started a new job travelling up Pennsylvania Ave. to become Biden’s National Economic Council Director. With her dovish voice now gone, that only leaves Cook, Goolsbee, George, and Harker on the top of the Doves list, and 2 of those are new members (they may be a bit demurer when it comes to public speaking).

Why am I writing about all these obscure figures, and why do I reserve a spot in my NEXT UP section for Fed Speakers? Because what they say does, indeed, impact the market, and that Fed-speak is very much a part of Fed policy. When Fed members speak, markets adjust, and hopefully, so does the public. Forward guidance from the Fed has been a mainstay since the Bernanke days. That guidance, as we know, does have an effect. Mortgage rates, Treasury Bill yields, and many other lending rates rose in late 2021 well before the Fed even made a single rate hike. Words alone made that happen. On the stock markets, it is important to remember that Fed members view a wildly rising stock market as being inflationary. A rising bond market which causes yields to come down also works against the Fed which is trying to keep rates restrictive.

Just a few days back, James Bullard did his thing causing the markets to fall. Just yesterday Raphael Bostic did his thing saying that he favored only a +25 basis-point hike at the next policy meeting. He also went on to say that rate hikes could end by summer. The markets liked those words which were largely the driver for yesterday’s rally in stocks. Wouldn’t you know it, right after the market closed, Christopher Waller, a Fed Governor said that hotter economic numbers would warrant higher rates. He is one of the most hawkish FOMC members. Lots of opinions surely make for a hearty, well rounded committee. Next week, the Chair himself will be on Capitol Hill where he is sure to say something that will be of interest to the markets. Dove Brainard has flown the coop, hawk Bullard does not have a vote this year, neither does dove Bostic, but hawk Waller has a vote, and the guy in charge, slightly hawkish Powell, his vote holds the most weight. Stay informed.

YESTERADAY’S MARKETS

Stocks meandered until dovish Fed comments incited a rally into the close. The S&P500 rose by +0.76%, the Dow Jones Industrial Average climbed by +1.05%, the Nasdaq Composite Index traded higher by +0.73, and the Russell 2000 Index advanced by +0.22% Bonds declined and 10-year Treasury Note yields rose by +6 basis points to 4.05%. Cryptos lost -0.26% and Bitcoin pulled back by -0.61%.

NEXT UP

• ISM Services Index (Feb) may have pulled back to 54.5 from 55.2. This can be a market mover as services have been a big driver of inflation in recent months. Pay attention to the Prices Paid component.
• Fed Speakers today: Hawk Bowman, Dove Bostic, Dove Logan, and Hawk Barkin.
• Next week: Earnings season winds down. Additionally, we will get Factory Orders, Durable Goods Orders, JOLTS Job Openings, the monthly employment report, and Powell’s testimony on Capitol Hill. Check back on Monday for calendars and details.