Powell quickly "put out the fire" to save the market

Powell ignites the best "Federal Reserve decision day".

On Wednesday local time, after the Federal Reserve lowered its economic forecast for this year and raised its inflation forecast, Powell expressed "indifference" to economic risks at the subsequent press conference, and once again put forward the "temporary inflation theory" , revealing a "firm" stance to maintain the status quo.

Analysts believe that his "careless" attitude towards US economic risks has had a significant impact on market sentiment, and he seems to be "deliberately appeasing the financial markets."

Driven by Powell's subtle gesture, stocks and bonds in the U.S. market rose together overnight, a rare event.

The S&P 500 and Nasdaq rose by more than 1%. The S&P recorded its best performance on the "Federal Reserve Decision Day" since July last year . The 2-year U.S. Treasury yield once plunged by more than 10 basis points, and the 10-year U.S. Treasury yield fell by more than 4 basis points, setting a new daily low.

Spot gold prices hit record intraday highs for two consecutive days, approaching $3,052 during Powell's press conference.

In a nutshell, almost all asset classes recorded gains except the US dollar.

It is worth noting that Powell's "temporary inflation theory" reminds people of the memory of the Fed's slow response to the surge in inflation driven by the epidemic. Whether this strategy can work is undoubtedly the focus of the current market.

Powell insisted in 2021 that inflation was only "transitory", which turned out to be a costly misjudgment. Instead of abating briefly, inflation soared to its highest level in 40 years, forcing the Fed to raise interest rates sharply in the later period to control prices.

The difference is that this time Powell emphasized uncertainty more, and the word he emphasized most at the meeting was "uncertainty." When Fed officials begin to emphasize "uncertainty," it usually means they are leaving room for policy shifts.

The Fed remains on hold and will slow down its balance sheet reduction from April

On Wednesday, March 20, Eastern Time, the Federal Reserve announced after the meeting of the Federal Reserve's Monetary Policy Committee (FOMC) that the target range for the federal funds rate would remain unchanged at 4.25% to 4.5%.

This is the second consecutive monetary policy meeting of the Federal Reserve to decide to suspend interest rate cuts. The Fed has raised interest rates by 525 basis points from March 2022 to July last year, and has cut interest rates in three consecutive meetings since September last year, with a total reduction of 100 basis points.

At the same time, the Federal Reserve announced that it will slow down the pace of reducing its balance sheet (balance sheet reduction) from April. This is the first time the Fed has adjusted its balance sheet reduction since June last year. From June 2022 to the end of last year, the Federal Reserve has reduced its balance sheet by nearly $2 trillion.

The interest rate forecast dot plot released by the Federal Reserve after the meeting showed that Fed officials still expect two interest rate cuts this year, as they did at the end of last year.

Concerns about stagflation and tariffs remain

In terms of economic and inflation prospects, the Federal Reserve simultaneously lowered its economic growth forecasts and raised its inflation forecasts , once again raising concerns about stagflation.

The Federal Reserve expects inflation to rise from the current 2.5% to 2.7% by the end of the year, still well above the Fed's 2% target; it lowered its GDP growth forecast for this year from 2.1% to 1.7%, a significant slowdown from the level of nearly 3% in 2022 and 2023.

After the Fed's decision was announced, Nick Timiraos, a senior Fed reporter known as the "New Fed News Agency," commented that the Fed has extended the suspension of interest rate cuts this time and views the economic outlook more bleakly than before. Fed officials expect both inflation and unemployment rates this year to be higher than before, reflecting the possible impact of tariffs.

He pointed out that almost all Fed officials expect downside risks to economic growth and see upside risks to unemployment and inflation expectations.

Sam Stovall, chief investment strategist at CFRA, said in a report that the FOMC's oscillation between stickier inflation and slower growth likely stems from uncertainty about future tariff policy , particularly the reciprocal tariffs that the Trump administration plans to discuss on April 2.

"Stocks and bonds did not initially react to the news as the market realized that the 'conflicting' economic forecasts were likely the Fed's signal that it needed more clarity before adjusting monetary policy."

Powell puts out economic anxiety and reassures investors

Powell reassured investors at a news conference by suggesting the Fed saw no need to take drastic action on tariffs and their impact on inflation.

He said, "We are indeed seeing pretty solid hard data right now," with job growth "at a healthy level" and the unemployment rate "very close to its natural level," suggesting the U.S. economy is "healthy."

Powell acknowledged that the risk of a recession may have increased in recent months, but he sought to reassure the public that the likelihood of an imminent recession remains low.

When asked how much of the Fed's upward revision of inflation expectations was caused by tariffs, Powell replied that it was difficult to analyze to what extent inflation was driven by tariffs, and the "baseline" forecast was still that tariffs had a "temporary" impact on inflation.

“As I mentioned, sometimes it’s appropriate to ignore inflation if it’s going to go away quickly if we don’t act, if it’s transitory. That may be the case with the tariff inflation. I think it depends on whether we can get through the tariff inflation quickly.”

He noted that if long-term inflation expectations are well controlled, the Fed can ignore the one-off shock of policies such as tariffs. At present, long-term inflation expectations have been stable, allowing the Fed to ignore it .

He said the impact on inflation was temporary "the last time we had tariffs" during Trump's first term as president.

During Powell's press conference, the U.S. stock market rebounded rapidly, with the three major U.S. stock indexes hitting new highs, U.S. Treasury prices jumping, and the two-year U.S. Treasury bond yields diving and falling below 4.0%. Gold hit a new high, cryptocurrencies rebounded, and the U.S. dollar narrowed its intraday gains.

Kathleen Brooks, director of research at XTB in London, commented that Powell's controversial re-use of the word "transitory" to describe expectations of tariff-induced inflation showed that he "seemed to be going out of his way to reassure financial markets":

“This isn’t a ‘whatever it takes’ moment for Powell, but his nonchalant attitude toward risks to the U.S. economy has had a significant impact on market sentiment.”

UBS analysts said that Powell's performance gave them a hint of a "Powell put option," and his policy stance was more dovish than the market expected.

In UBS's view, the Federal Reserve is currently more concerned about economic growth than inflation risks, and believes that excessive focus on inflation caused by tariffs may have unnecessary negative impacts on economic growth.