CNBC Daily Open: Jerome Powell Flipped the Script

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This report is from today's CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

Markets had expected the Fed's quarter-point hike. Powell's warnings on the economy caught them off guard.



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What you need to know today

  • Fed officials unanimously agreed to increase rates. But at the post-meeting press conference, Fed Chair Jerome Powell admitted the committee considered pausing hikes because "events in the banking system over the past two weeks are likely to result in tighter credit conditions."
  • Asked by a senator if Treasury is considering guaranteeing all bank deposits without congressional approval, Treasury Secretary Janet Yellen said it is not.
  • PRO GameStop surged 35.24% on the news that the company's had its first profitable quarter in two years. But analysts are warning investors not to jump into the stock because it's still facing longer-term headwinds.

The bottom line

The last few Federal Open Markets Committee meetings have followed a pattern. The central bank would take a hawkish stance and hike rates aggressively, spooking markets. Then Powell's comments at the press conference would soothe investors, who'd focus on his dovish remarks (probably unintentional and to his chagrin, I'd imagine).

This time, Powell flipped the script.

Markets had expected a hike of 25 basis points, and that's what they got. Being right contributes to a sense of certainty, so all three major indexes actually rose after the Fed's announcement. Indeed, Quincy Krosby, chief global strategist of LPL Financial, noted "markets are responding well to the expected 25 basis points rate hike."

Then Powell started speaking. At first, his reassurances that the "banking system is sound and resilient" continued soothing markets. Then Powell started talking about "tighter credit conditions for households and businesses" that could "easily have a significant macroeconomic effect." Worse, these conditions were not reflected in stock indexes since they "don't necessarily capture lending conditions." This signaled that the economy could be in a worse place than many had thought, wrote CNBC's Patti Domm.

As if trying to prove Powell wrong, markets began sliding about an hour after Powell's speech and couldn't arrest their decline. By the end of the day, the Dow Jones Industrial Average lost 1.63%, the S&P 500 fell 1.65% and the Nasdaq Composite sank 1.6%.

They were certainly not helped by Treasury Secretary Janet Yellen's clarification that, contrary to how markets took her Tuesday comments, the Federal Deposit Insurance Corporation was not considering "blanket insurance" for banking deposits — as I'd warned in this newsletter yesterday.

The good news is that the Fed forecast it'll hike interest rates only one more time — probably by another 25 basis points — before pausing. A cut, however, is not on the table, if Powell is to be believed. Amid the ongoing banking turmoil, coupled with the Fed's warning about the broader economy, it might be better for investors not to fight the Fed.

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