Does Jerome Powell hate investors?

If you ask most share market investors, they would say that US Federal Reserve chair Jerome Powell simply doesn’t like them.

After all, just as the market was stepping up nicely after the latest rout, Powell stepped in with a bout of hawkish rhetoric that sent Wall Street – and the rest of the world’s share markets – tumbling.

By making it clear he was deadly serious about tackling inflation no matter what the consequences, Powell sent a direct message that he was not going to be distracted by what was happening on the share market and he even embraced the concept of “some pain” for households and business.

It has been a rude and unpleasant reminder of the power of central bankers to control the environment for share prices and enough to give the average investor the impression that they are not only battling headwinds such as the COVID-19 pandemic, war in Ukraine and elevated energy prices, they were battling the Fed as well.

Perhaps Powell’s message should be applauded?

While such a reaction is understandable, let me put forward an alternative narrative that Powell’s actions should instead be applauded and welcomed.

The first thing to note about Powell’s hawkishness is that it was immediately effective – share prices that had been rising gently really fell out of bed and billions of dollars of value was wiped off the value of companies.

In the short term that is definitely disappointing for investors but they should also draw a lot of comfort from this reaction.

An important part of the arsenal of tools available to central bankers is the art of “jawboning” – saying stuff that gets a desired reaction.

Jawboning can do the work

In this case, the reaction being sought was a realisation that the Fed was serious about fighting inflation – quite a change from a year ago when it was describing higher prices as “transitory”.

The really big benefit of jawboning is that it can help to avoid the use of some of the other weapons in a central bank arsenal – such as interest rates.

While there is little doubt that the US Fed will continue to raise interest rates in the near-term, Powell also set out a program of what to expect from here, with the Fed set to “pause” once it reaches something approaching an “appropriate” level.

Exactly what that level is remains to be seen, although other US Fed members have suggested 3.4% as an appropriate level to pause at.

Will this be a pause that refreshes?

Just how long such a “pause” would last is also subject to conjecture – it could be months over even years but we will get to know about it, probably some time in the first half of next year.

What is worth noting is that this is quite different to the accepted path of interest rate rises, which was to keep raising them until they hit 4% or above and then start cutting them to deal with the resultant recession.

The current inverted yield curve in the US certainly points to a recession down the track but what it doesn’t point to is when that might occur.

Can a recession be postponed?

This is where the opportunity lies in Powell’s successful exercise in jawboning and resetting market expectations.

Should the US economy slow but not enter recession in the short term, that could result in company profits that are larger than the fairly bleak expectations out there.

With inflation already moving lower, even with quite a way to go before they are in the 2% range favoured by the Fed, it is possible that US profits could exceed pessimistic expectations.

In that context, the share market rally that Powell has crushed so successfully can be regarded as more of a sustainable recovery rather than a bout of irrational exuberance.

Which is where the opportunity lies rather than getting too depressed about the less than cheery messages coming from Powell.