Fed’s Powell Spooks Markets, Drops “Transitory” Tag for Inflation

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Key Takeaways

Fed Chair Jerome Powell says it’s time to retire the word transitory when describing inflation
Wall Street stocks dropped nearly 2%, cryptos gain with Ether in the lead, up about 10%

What’s New Around the Markets?

Federal Reserve Chairman Jerome Powell spooked the financial markets on Tuesday during his appearance before the US Senate. In his hearing, Mr. Powell commented on the growing uncertainties ahead for the US economy.

Among those challenges, he cited the threat from the new Omicron virus variant and looming inflation concerns.

On the latter, Jerome Powell’s testimony suggested it was about time to leave out the word “transitory” when speaking about inflation. In other words, inflation is here to stay, he suggested.

“The risk of higher inflation has increased. We tend to use [transitory] to mean that it won’t leave a permanent mark in the form of higher inflation,” Mr. Powell argued. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”

What’s on Focus for Investors?

To this end, consumer prices started rising last year on the back of the extraordinary stimulus from the Fed. More precisely, the US central bank has been injecting $120 billion in monthly asset purchases to sustain the economy.

In that context, Jerome Powell has been saying inflation will come down, which has so far failed to materialize. In practice, consumer prices have surged this year with a 5% annual increase for October.

Further, to try and bring down consumer prices, the Fed considers it is perhaps appropriate to quicken the reduction of the asset purchases.

“The economy is very strong and inflationary pressures are high,” he said. “It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases… perhaps a few months sooner.”

Where Are Stocks Headed?

Against this backdrop, Wall Street stocks got hit. A retreat in the major equity gauges followed right after Jerome Powell’s comments. More specifically, the Dow Jones, the S&P500, and the Nasdaq Composite slipped 1.6% to 1.9% amid the increasing uncertainty.

With this in mind, the growth outlook for stocks heading into the final month of the year looks relatively gloomy. The current quarter has seen elevated jitters as investors try to position for a stimulus reduction and higher rates coming next year.

Still, some individual stocks have performed remarkably well. Apple, for example, just reached an all-time closing high. Shares of the iPhone maker rallied 3.16% on Tuesday amid the sea of red. On the way up, Apple surpassed Microsoft to become the most valuable company in the world. On that note, Apple is now worth $2.7 trillion, while Microsoft commands a valuation of $2.5 trillion.

What’s the Latest News on Bitcoin?

Bitcoin and the cryptocurrency market are fairly flat early Tuesday with the exception of Ether, the second-biggest token. That said, the Ethereum coin is pushing to a new all-time high and is currently less than 2% away from its current record. The price of Ether now hovers slightly below $4,800 per token. The record high, in comparison, sits at $4,860 achieved on Nov. 10.

Still, for the previous month, the Ethereum token is up about 8.5% to the current market price. Bitcoin, on the other hand, is down 7.5% for the same period.

What’s Next for Financial Markets?

Economic news continues this week with another hearing of Jerome Powell today. Moreover, Friday brings us the latest non-farm payrolls report. The data will show how many new jobs were added to the US economy for November. It will be keenly watched by traders and investors and elevated volatility could be expected.

Today’s Economic Calendar (EST times)

09:00 am, GBP, BoE Gov Bailey Speaks
10:00 am, USD, Fed Chair Powell Testifies
10:00 am, USD, ISM Manufacturing PMI (Nov)
10:30 am, USD, Crude Oil Inventories
07:30 pm, AUD, Retail Sales (MoM)