What Do You Say, Jay?

Fed Chair Jay Powell finds himself in a bit of a bind ahead of Wednesday’s Fed Decision and press conference. On the one hand, he faces a crashing stock market; on the other, raging inflation. The tone he strikes in his press conference may well determine the short term direction of the market.

As you can see in the chart above, the NASDAQ is down ~16% in the last two months. All of the index’s gains for the past year have been wiped out. Microsoft (MSFT) reported a solid quarter after the close Tuesday with revenue +20% to $51.7 billion and Diluted EPS +22% to $2.48. Shares are currently +1% in the after hours. However, that is not likely to stem the tide if Chairman Powell is perceived as hawkish tomorrow.

On the other hand, inflation continues to rage. The Wall Street Journal ran a story Tuesday morning on grocery prices (“Surging Grocery Prices Spur A Rise In Bargain Hunting” [Subscription Required], Jaewon Kang, B1). Consumers are starting to notice they are going up which could feed into rising inflation expectations. For instance, Natalie Existe, a health counselor from New Jersey, said she now spends $200 a trip on groceries compared to $150 or $125 a few months ago. “I’m getting creative with trying to save money”, said Ms. Existe. “I was never somebody who was super price conscious. I am now looking”, said Lauren Eccleston, an account manager for a manufacturing company. On Monday afternoon, Steel Dynamics (STLD) reported that the average price they received for a ton of steel in 4Q21 more than doubled to $1,662 from $814 a year ago. Loose monetary policy is the primary reason prices are rising so Chairman Powell can’t afford to be overly dovish either.

Since the Fed just pivoted to getting serious about inflation in December by accelerating its tapering plan, it’s almost certainly too soon for any change in official policy. Therefore, it comes down to Chairman Powell’s choice of words and tone in the press conference. So what do you say, Jay?