Federal Reserve Chairman Jerome Powell spoke to the Peterson Institute for International Economics in Washington, D. C. this morning, May 13.
Before speaking, the S&P 500 futures contract was up from the close on Monday.
After speaking, the S&P 500 stock index dropped and the index opened the day below the close of the market on Monday.
The Wall Street Journal reported,
“U.S. stocks opened lower Wednesday after Federal Reserve Chairman Jerome Powell said Congress and the White House will need to spend more money to make sure policy makers’ quick initial response to the coronavirus-induced economic contraction isn’t wasted.”
Investors Very Sensitive
This market movement shows just how sensitive investors are to the Federal Reserve and what the Federal Reserve is trying to do.
I have been writing about this fact in articles like “The Stock Market Needs the Federal Reserve,” and “World Trust in Federal Reserve Seems to Continue.”
This morning just indicates how sensitive investors really are.
Mr. Powell’s comment does not seem negative, but it does indicate that there still is a lot of work to do.
Work To Be Done
In his speech, the Chairman talks about all that has been done so far. But, he concludes,
“At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way. Recall that the Fed has lending powers, not spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis.”
“But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems.”
“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
In other words, Mr. Powell leaves the door open. The Fed will continue to do what it can.
However, as he makes clear, the Fed only has lending power – it does not have spending power.
Thus, the federal government must step up an be a part of the show, the Federal Reserve cannot do it all.
There Is Trust In The Fed, But Not Trust In The Government
And, what did the market do this morning after hearing this?
The stock market declined. Although investors appear to trust the Fed, there seems to be a lack of trust in what Congress can get done.
Mr. Powell is saying that whereas the Fed may be able to put a bottom on “liquidity” problems in the financial system, it cannot guarantee that it can put a bottom on “solvency” problems.
I have written about this before,
“One of the greatest looming concerns of the Federal Reserve is the possibility of a rash of bankruptcies that might end up producing a ‘solvency’ crisis in the banking system, rather than just a ‘liquidity’ crisis that the Fed seems to be well prepared for.”
Investors are very, very sensitive these days. There is a massive amount of uncertainty around. Mr. Powell stated as much in his speech this morning.
Investors must have trust in both the Federal Reserve and the Congress.
We see evidence of this sensitivity every time there is a new concern over whether or not the federal government can be trusted.
This sensitivity carries with it the concern that if the Federal Reserve or Congress loses this trust the stock market might take a pretty steep plunge.
Corporate earnings are not driving the stock market these days.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.