No Powell Put

If market participants thought there was going to be Powell Put coming out of today's FOMC meeting, they were sorely disappointed as the the S&P 500 sold off by 92 points (850 Dow points) from the timing of the 2:00 PM announcement of  an increase in the Fed Funds rate by 25 basis points to the intraday low.  Perhaps more important 10-Year Treasury Yields declined by 9 basis points intraday. Put bluntly, the markets now believe that the Fed is making a major policy mistake. Powell's money quote during his press conference was "policy at this point doesn't need to be accommodative."  

My sense is that the markets are protesting too much. After all the Fed downgraded the potential for rate hikes next year from four to two, lowered it long term federal funds rate estimate from 3.0%-2.8%. He also noted that the Fed will continue to be data dependent which means the Fed doesn't have to do anything at all next year. He buttressed that point by stating the Fed policy is now at the low end of neutral for the Fed Funds rate. This is way more dovish than last September, but with the 13% sell-off in stock prices since then the market wanted more.

Nowhere is it written that the path to interest rate normalization would be trouble free. The markets are now paying the price for a 10 year policy of extraordinary monetary ease.  My instant analysis is that both stocks and bonds over-reacted, but higher volatility will be here to stay.

One last point the Fed did downgrade its GDP growth outlook from 2.5% to 2.3% next year, getting close to our UCLA Forecast of 2.1%. However the Fed is at 2.0% for 2020 while we are at 1.0%.