U.S. Fed Mumbles, Stocks Stumble

New York Stock Exchange
(Photo by Silveira Neto) (CC2.0)
U.S. equity markets crashed, giving up earlier gains of more than 1%, after the Federal Reserve took less notice of market risks than investors had hoped.
Investors headed for the doors when Fed Chairman Jerome Powell insisted during his press conference that inflation was “symmetric” around 2%. He’s entitled to his opinion, but most of us read the numbers differently. The Fed seems indifferent to imploding inflation expectations, and that’s very bad for markets.
We expected the Fed to backpedal and give stocks a temporary boost. Expectations to that effect buoyed stocks Wednesday morning, but no longer. Notably, the small-cap Russell 2000 Index was the worst performer, down by more than 2%, for a total peak-to-trough decline of 23%. NASDAQ was down more than 2%, led down by semiconductor names.
The Federal Open Market Committee’s language was unchanged from its November statement, saying, “On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.”
The gauges of inflation expectations visible to the rest of us don’t look little changed. Investors expected a 2.2% inflation rate over the next 30 years in April; now they’re putting their money on a 1.9% rate.
As we noted earlier this week, oil explains a lot of the collapse of market inflation expectations (so-called breakeven inflation, or the difference between the yield on nominal and inflation-indexed Treasuries). But it doesn’t explain all of it, and that ought to worry the Fed. The fact that it doesn’t worry the Fed is a worry in itself.
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