Chairman Powell’s interview on 60 Minutes was largely as we expected. Powell highlighted the inflection point in the economy and that “the outlook has brightened substantially.”
Nonetheless, Chairman Powell was steadfast in his view that the Federal Reserve would not be adjusting policy in the foreseeable future.
When Scott Pelley asked Powell if he foresaw any potential interest rate hikes in 2020, the answer was as unequivocal as it gets for a theoretically data dependent Federal Reserve Chairman.
Powell responded “I think it's highly unlikely we would raise rates anything like this year, no.” Pelley noted the Fed’s “easy money helped rescue the nation, but cheap borrowing can also fuel excessive risk taking in the stock markets. This year, investors have borrowed more than $800 billion to speculate in stocks. Last time there was a run up that fast was just before 2008's Great Recession.”
When asked if the nation was in a speculative bubble, Powell responded “…some asset prices are elevated by some historical metrics. Of course, there are people who think that the stock market is not over-valued, or it wouldn't be at this level. We don't think we have the ability to identify asset bubbles perfectly. So, we focus on, what we focus on is having a strong financial system that's resilient to significant shocks, including if values were to go down.”
There is irony in Powell’s response since we have witnessed structural weaknesses in the past 18 months, some of which the Fed was aware of and others it was not.
There were the pre-covid problems with the repo market in the second half of 2019. The Fed’s response was to reinstate asset purchases. Then there was a peak in the covid catalyzed Treasury market in March. The Fed’s response was to step in and buy hundreds of Billions of Treasuries from over-levered hedge funds at the top of the market.
Clearly, the Central Bank's purchase of any asset that comes under duress gives the impression of a “strong financial system that's resilient to significant shocks including if values were to go down.”
The most recent structural weakness revealed was obviously the Archegos Capital liquidation. There is no doubt that the liquidation was far from a market risk event, but there are reasons for concern. In the interview, Powell even noted his surprise the “substantial losses to these large firms in a business that is generally thought to present relatively well understood risks.”
Obviously, the banks that incurred the losses are regulated, supervised and stress tested by the Fed. The Fed, along with the banks, were unaware of the risks.
Imagine the risks and structural weakness that would be revealed if the Central Bank was not perpetually buying assets and inflating the financial system.
This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.