Traders are accustomed to a bumpy ride whenever Jerome Powell speaks. But when Powell speaks at the same time Janet Yellen is talking to Congress about the banking sector’s health, the turbulence can get overwhelming.
That happened on the afternoon of March 22 as the back half of the Federal Reserve chairman’s press conference overlapped with the Treasury Secretary’s appearance before a Senate subcommittee. The S&P 500 fell, rose, went back to unchanged, then plunged again as traders tried to synthesise comments on the health of the economy, rates trajectory, the state of banks and how far the government will go to protect depositors.
Two people of such stature rarely speak simultaneously, worse when they project messages that traders interpret as in opposition. After hearing what they thought was Powell tipping broader protection to depositors should financial stress spread, Yellen came on the feed to knock the hope down. The S&P 500 erased an earlier gain of 0.9%, marking the sixth time this year that an intraday rally of that size was reversed.
“It’s astounding that Yellen and Powell would have given contradictory messages on bank deposits at the same time,” said Steve Chiavarone, senior portfolio manager and head of multi-asset solutions at Federated Hermes. “Powell essentially said that all deposits are safe, Yellen said, ‘Hold my beer.’ You would have thought that they would have coordinated.”
Asked about a broad increase in deposit insurance, Yellen said that it was “not something that we have looked at. It is not something we are considering.” That happened around 3pm in New York after Powell said the banking system was sound. Yet some argued that his insistence that the Fed would continue to raise rates higher than expected if it sees the need to do so also helped push stocks lower.
See also: Fed cuts rates by half point in decisive bid to defend economy
Traders noted that bank stocks took the brunt of the pain following Yellen’s comments. The SPDR S&P Bank ETF, which tracks regional banks in the US, fell 5.7%.
“Her comments clearly affected bank stocks negatively, but her comments roughly coincided with Powell’s comments that they will continue to do what it takes to fight inflation, including raising rates more than anticipated,” said Steve Sosnick, chief strategist at Interactive Brokers. “It’s tough to untangle them.”
In the days leading up to the Federal Open Market Committee release, investors disagreed over how the central bank would move, with economists at some of the biggest banks saying it wasn’t going to raise rates at all. But the Fed hiked for a ninth straight meeting and said more raises could come.
See also: Fed to hold interest rates steady but start considering cuts
The FOMC voted unanimously to increase its target for the federal funds rate by a quarter percentage point to a range of 4.75% to 5%, the highest since September 2007.
But Powell and Yellen are trying to thread the needle between causing more havoc while also saying the government will cover any private risk, says Mike Bailey, director of research at FBB Capital Partners.
“Unfortunately, investors were walking on eggshells before the Powell and Yellen comments, and the duelling messages are leaving investors in a state of confusion, as seen in the drop in the S&P,” Bailey said.
Pinpointing exactly what’s moving the market minute-to-minute is an inexact science at the best of times. Doing it when two of the most important people in finance are speaking on duelling streams is an enterprise doomed to futility in most respects. In the end, Wednesday’s verdict on Powell and Yellen’s stereo address was negative. The S&P 500 tumbled 1.7% for its worst fall in two weeks. On the other hand, it’s still up for the week. — Bloomberg
