Jay Powell blinks

Change in Fed’s tack brings back bad memories, says Aberdeen Standard Investments Senior Investment Manager James Athey.

"The Fed is starting to sound a lot different to the central bank that we thought we would have under Jay Powell", says James Athey, Senior Investment Manager at Aberdeen Standard Investments, and adds: "Janet Yellen attracted a lot of criticism, rightly or wrongly, for being too reactionary. This created a self-fulfilling prophecy where volatility in financial markets would cause the Fed to change tack, which would in turn cause exactly the kind of volatility that meant the Fed erred in the first place."

In that respect, Powell’s shrill concerns about growth sound like echoes from the past, assesses Athey. At the moment, the only clear sign of any slowdown in US economic data would be from that which is linked to interest rates. "If you were worried about a slowdown in those measures then it defeats the point of tightening policy in the first place", says Athey. Equally, what is going on in the price of assets in the US is arguably what should happen when the Fed raises interest rates. "The price of assets right now does not appear to be an economic issue and therefore the Fed should not sound alarmed by them", he argues.

As Athey explains, one thing that Powell did well initially was to sell hikes as a good thing. He said he was hiking because the economy was strong. That approach suggests that quantitative tightening would be a cathartic process. Even though painful at times, quantitative tightening would purge the system of excess liquidity and a misallocation of resources. "But now he’s sounding a lot less confident. In the absence of any data to back up those concerns, he is looking like a price taker and gives the market the impression that they are in control once again. He’s handed the drugs back to the addict", criticizes Athey.

In his eyes the change in Powell means that we are back to a situation where investors have to price the Fed quarter by quarter. It means Treasuries continuing to rally, a flatter or even inverted yield curve. It also means that markets will twist and turn with every pronouncement from the Fed as investors try to work out how they will react next.

"The bigger worry is that Powell’s worries about growth start to manifest in actual economic activity. His message yesterday to Main Street was certainly as bad as it was to Wall Street. Jay Powell is in grave danger of calling forth the very demons that he’s suddenly so worried about", says the Senior Investment Manager.