What Powell said and what he didn’t say　　【Shun Nakahara's Today's Remark】Updated August 29



Chair Powell's “eight minutes” is over. The result was a dramatic stock market plunge, but yields hardly moved. So why did this stark contrast occur?

In the previous column, it was suggested that it would be clearer to consider “what Chair Powell absolutely wants to avoid and what he will not say”—a forecast that he would avoid expansive, dovish statements. In fact, all of Chair Powell’s remarks were hawkish.

As anticipated—many analysts and strategists agreed. In reality, the market consensus was that he would deliver fairly hawkish remarks, and indeed that line held. The risk scenario for equities materialized, while the risk scenario for bonds did not.

The stock market risk scenario was the length of time for which rates would be raised. The best-case scenario would be a halt to rate hikes within the year and a rate cut in 2023, but that outlook was far too optimistic. Even if inflation were showing signs of peaking, it remained too high.

The Fed would stay aggressively tightening toward the goal of 2% price stability—this much was already priced in by the market, and the sharp rise in rates had incorporated that outlook.

The market had priced in 2023 rate hikes, but what was unexpected was the explicit statement that rates could be held high at around 4% in 2024 or possibly higher. The previous column’s forecast that “markets think the terminal point of tightening will exceed 4%, and if the possibility of going well beyond that is shown, it could be quite a negative surprise” came true. Given that stocks are securities whose prices are always influenced by bond yields, the long duration of tightening would become a downward pressure on stock prices. The “shock” for equities was right here.

So why did bonds not move as much? Quantitative tightening has been unwinding in a way that does not roll over maturing bonds, but there was no policy to engage in a massive outright sale to push long-term rates higher. There was no explicit plan to conduct a large-scale market sell-off.

Since the Lehman crisis, the Fed’s large purchases have reduced liquidity in the market—especially in the bond market—and any change in policy could trigger a sharp rise in long-term rates. Yet Chair Powell’s remarks on this point were absent.

In the end, Chair Powell was more hawkish than expected, but while he presented a horizon for the terminal point of rate hikes that was far above hawkish market expectations, he did not announce outright sales of holdings or a comparable new tightening measure. Keeping rates high has weighed on stocks and lifted the dollar, but he avoided destabilizing the financial system.

However, the calm in the bond market may be temporary. The Fed is said to be irritated by the long-term yield staying at a low level despite successive rate hikes, and there is always the possibility of a significant policy reversal regarding the sale of holdings. The Fed’s bond holdings are likely to have substantial unrealized losses, which poses a constant political risk of becoming an issue in Congress.

The Fed can always surprise the market and flip its stance, plunging the market into panic. It would be wise to keep this in the back of one’s mind at all times.