As the closing bell for US stocks sounded this week, Wall Street traders and analysts also entered the traditional “Christmas holiday time,” but at this juncture, the Fed entered a “crisis PR” mode.

The origin of the incident was Fed Chairman Powell.

Has Powell been misunderstood again?

After the Federal Reserve released a more “dodgy” interest rate decision and “bitmap” outlook on Wednesday this Wednesday, Powell, who has always talked over and over again over the past two years, has gone against the norm and publicly stated at the press conference:

The question of when it is appropriate to begin to gradually reduce the current restrictive policies — this question has begun to enter our eyes and has clearly become a topic of discussion in the outside world. This is also what we are discussing in today's meeting.

This statement has also caused the market to fry a pot — who would have thought that over the past year or so, Powell, who has only repeatedly said “inflation is too high” and “depends on data,” would unabashedly talk about interest rate cuts?!

According to statistics, counting the day Powell spoke, the total value of US stocks and bonds surged by 2 trillion US dollars in just 3 days. If you start counting from the last time the Federal Reserve met in November, the value of US stock bonds has increased by a net amount of 7 trillion US dollars.

There are also extrinsic benefits from this incident — the value of the global stock and bond markets increased by 4 trillion US dollars this week. Also, starting in early November, the net increase can reach 15 trillion US dollars.

The Fed chairman's speech propelled the stock market to rise, which should be a good thing in the vast majority of cases, but this week's situation may have gone too far:

After Powell's speech, the market once set expectations for interest rate cuts in 2024 to close to 170 basis points, which is equivalent to cutting interest rates by 25 basis points every time the Federal Reserve meets in March next year;

The S&P 500 Index continued to rise for 7 weeks, setting a new record of continuous gains for the past 6 years (after November 2017);

After Powell's speech, as many as 49% of the S&P 500 constituent stocks were “overbought”. This is a situation not seen in US stocks since February 1991.

What's more, the Russell 2000 Index, which represents small-cap US stocks, also experienced a rise from a new low in the past year to a new high in the past year in less than 50 days. Since the inception of this index in the 80s of the last century, there has never been such a drastic increase.

Against the backdrop that the US economy will gradually slow down in the next few quarters (the Federal Reserve's official statement), the rise in US stocks is more likely to point to an increase in valuations. The sustainability of the increase depends on whether subsequent corporate profits can keep up. However, with the exception of Nvidia and a few other celebrity stocks that are currently in short supply, even Apple, the leading US stock company, is afraid to express optimism about next year's performance.

More importantly, there is an unequivocal assertion that “it depends on the data,” yet the US economic data shows no basis to support the sharp shift of the Federal Reserve — the decline in inflation is in accordance with regulations, and the recent non-agricultural sector is still stronger than expected.

In response to this, the Financial Services Association also raised the market's questions in yesterday's report: What kind of data are you looking at by turning pigeons? Isn't it Biden's approval rating?

Since Powell also mentioned a “slowdown in interest rate hikes” in July last year that triggered a sharp rise in the stock market, then ended miserably with the “black 8 minutes” of the Jackson Hole annual meeting at the end of August, I'm afraid he will have to wait until his next public appearance to get a chance to clarify whether his meaning has been misunderstood by the market.

At least judging from the status of the three officials who spoke in a row on Friday, the Federal Reserve is probably not satisfied with market trends in recent days.

Williams, Bostic, and Goulsby shouted one after another

The first person to play last night was New York Federal Reserve Chairman Williams. As the “No. 3 person” in the Fed system, he threw a “straight ball” refuting Powell:

Williams said “interest rate cuts are not really being discussed right now,” while stressing that he believes “it is still too early to think about cutting interest rates now,” and that if the progress of inflation stagnates or reverses, the Fed needs to prepare for further tightening of policies.

Afterwards, Atlanta Fed Chairman Bostic also made slightly gentle remarks, implying that interest rates will only be cut twice in 2024, and that the first rate cut will be after the third quarter.

Bostic “doesn't think interest rate cuts are imminent,” and he said policymakers still need “a few months” to observe sufficient data and gain confidence that inflation will continue to decline.

The most “dove” of the three is Chicago Federal Reserve Chairman Goulsby. The focus of his speech was “no possibility can be ruled out,” and apparently he is not as dovish as the market might think.

Goulsby expects next year's interest rates to be lower than current levels, but there will be no significant decline. He stressed that as inflation falls, it is necessary to consider the current restrictive state of policies and whether policies should be relaxed. However, “if we stop getting good news” and inflation does not move towards the target, then the Federal Reserve should prepare to raise interest rates.

After the trio played a “combo punch,” the market settled somewhat in pricing for interest rate cuts in March next year, and international gold prices also began a wave of diving at the end of the session. However, the ten-year US Treasury yield, which has received more attention, has had limited fluctuations, closing below 4% for the first time since August this year.

As far as Wall Street is concerned, it is not necessary to wait too long to find out exactly what the attitude of the Fed officials is. According to convention, the minutes of this week's meeting will be announced three weeks later, that is, on Wednesday of the first week of 2024 (early Thursday morning Beijing time). However, until then, the market was only able to spend about ten trading days during the holiday season under various speculations.

edit/emily