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There’s a massive disconnect between markets and the Fed – and Jerome Powell’s messaging could fall upon deaf ears

Happy hump day, readers. I’m senior reporter Phil Rosen. 

If the collapse of FTX has been the headline story over the last several months, it certainly feels like ChatGPT has taken the mantle for the near future. 

The bot’s parent company took in $10 billion from Microsoft a couple of weeks ago, and the language tool has proven it can do just about everything except your dishes and laundry. 

Oh — and it also can’t quite balance a portfolio. 

Remember Watson? That was the last bot that seemed to alter the fabric of society — it even won Jeopardy

As it turns out, Watson has more than just game shows in his (its?) wheelhouse. While ChatGPT wows us with its text capabilities, the IBM supercomputer has quietly powered an ETF that’s doubled the returns of the broader market. 

I’m serious.

But enough about bots. We can’t stop them.

Let’s break down what to know ahead of the Federal Reserve’s widely expected interest rate hike today. 


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jerome powellFederal Reserve Board Chairman Jerome Powell arrives at his news conference following the closed two-day Federal Open Market Committee meeting in Washington, U.S., May 1, 2019.

Yuri Gripas/Reuters

1. Today’s rate hike decision probably won’t surprise anyone, as markets have long priced in a 25-basis-point move for the February and March meetings. 

If all goes as planned, this will mark the eighth consecutive rate hike since March last year, which falls in line with what the Fed warned in December: 

“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” 

That means more rate hikes are on the way. 

But markets have yet to act as if that were the case — stocks have enjoyed their best January since 2019.

All eyes will be on Jerome Powell as he steps up to the podium today. To Michael Reinking, the New York Stock Exchange’s senior market strategist, the chairman will likely try to temper market enthusiasm with another hawkish message. 

“[Powell’s] message will likely continue to focus on the duration of time rates will stay at a restrictive stance,” Reinking said. “How he couches where we are in achieving that restrictive stance will be closely watched.”

Just like before December’s meeting, stocks have rallied leading up to the decision. Reinking pointed out that markets are just about desensitized to hawkish commentary.

Gene Goldman, the chief investment officer for Cetera Investment Management, told me on a call yesterday that rate hikes can take 12 to 15 months to have an impact on the economy, which means repercussions from last year’s first tightening efforts are only now beginning to emerge. 

Goldman said he’ll be watching for three things in Powell’s speech: 

  • Powell will talk tough: “He’s going to push back on financial markets. The dot plot says rates will be between 5% to 5.25% by the end of this year, but markets are pricing in 4.5%.”
  • More rate hikes are coming: “Powell might acknowledge that the economy is slowing down and inflation is easing, but he’s also going to signal the Fed’s job is not over.”
  • This time could be different: “It’s possible Powell signals that we won’t need to push the economy into a recession. The labor market and housing market are different than they were in 2008, so maybe there’s a different path forward here.”

In any case, according to Reinking, unless Powell musters up some serious aggression, any messaging will ultimately fall upon deaf ears

“[That] could add to the squeeze that has been ongoing since the start of the year,” he explained. “If this happens, the real test will be holding above the December highs.”

What will your investment strategy look like following another interest rate hike from the Fed? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know. 


In other news:

NYSE traders

NYSE

2. US stock futures fall early Wednesday, as markets brace for the Fed’s much-anticipated policy decision. Meanwhile, Snap shares sank over 14% in premarket trading after the social-media company missed on revenue in its fourth-quarter earnings. Here are the latest market moves

3. Earnings on deck: Meta, Alibaba, T-Mobile, all reporting.

4. US home prices could crash 20% this year, according to KPMG. The housing market has come under pressure in recent months, but the current downtrend may only be the beginning of what’s to come. These are the cities and regions that could see the largest declines.

5. The biggest risk to the market isn’t a recession in 2023. In JPMorgan’s view, the biggest risk is actually the possibility that there’s no recession at all — this is why.

6. Bank of America said Tesla and Ford’s EV price cuts make no sense. Currently, electric-vehicle demand is greater than supply, which makes for odd timing for such dramatic reductions. But in the near-term, Elon Musk’s company has the edge over its rivals because of its size and scale.

7. Gautam Adani pulled through with a $2.5 billion share sale on Tuesday. The Indian billionaire has endured a stock-market storm thanks to Hindenburg’s fraud allegations. Here are the latest updates.

8. Jeff Erdmann has been the best wealth advisor in the US for 7 years running. The Merrill Lynch pro explained how he’s keeping clients’ money safe — and how he’s gearing up for a recession. 

9. Goldman Sachs recommended these 17 stocks right now. Strategists said this batch of names have strong international exposure and are poised to profit from the economic recoveries of China and Europe. Get the list.

C3ai stock price on Feb.1, 2023C3ai stock price on Feb.1, 2023

Markets Insider

10. Shares of C3.ai have soared 85% over the past month. Investors are flocking to stocks that have exposure to artificial intelligence, thanks to the growing popularity of ChatGPT. C3.ai announced Tuesday it would integrate the viral bot into its product suite.


Curated by Phil Rosen in Los Angeles. Feedback or tips? Tweet @philrosenn or email prosen@insider.com

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.

Read the original article on Business Insider
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