What is Mr. Powell trying to say? What are markets hearing?
As Mr. Powell mentioned four years ago when for the first time he was in Senate for the nomination hearing, no one knows what is waiting there for him! While everything was fine in the first two years and the US economy was improving amazingly, just in a few days, the global economy, including the United States, entered an unpredictable crisis called the Coronavirus epidemic!
Mr. Powell and FOMC members already had two great historical lessons to learn! The Great Depression of 1929–39 and the Financial Crisis of 2007–08. Yes, we had other crises as well, like the Credit Crisis of 1772, the Boston Tea Party, OPEC Oil Price Shock of 1973, and the Asian Crisis of 1997. But the first two mentioned and the reaction of different governments were much better lessons to learn, especially the second one, the Financial Crisis of 2007–08.
Considering previous experiences, as Mr. Powell also mentioned, to avoid much worse pain, FED and US government supported the economy with the biggest ever stimulus packages that they could have, to stabilize the financial system. At the same time, an unforgettable global collaboration for the vaccine began. And now we are here as Mr. Powell also mentioned in his prepared speech in Senate: "The economy is expanding at its fastest pace in many years, and the labor market is strong."
This is is what Mr. Powell says, but the data have more details. While the overall unemployment fell to 3.9% in December, but the jobless rate for Black Americans rose to 7.1%. And probably that is the reason that Mr. Powell repeatedly has mentioned that raise rates can be delayed, even if unemployment fell, to allow the benefits of a tight labor market to reach minority communities as well.
Mr. Powell once more in this prepared speech said that "We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing, and transportation. We are strongly committed to achieving our statutory goals of maximum employment and price stability. We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched."
Therefore, while this economic improvement also, caused supply and demand to imbalances, and bottlenecks, and thus to elevated inflation, and while we are waiting to see more tightening policies from FED, we also, have to remember that strong support is not the only lesson that FED learned from previous crises. How to slow down and end the stimulus also will include experiences that can be used well.
If you look at the below SP500 Daily Chart, you can see the reaction of these thoughts in the market. Despite the correction in the past days and while still market has downtrend tendency, bears with RSI at 49, have not enough power to go further and sharper. SP500 has strong support at 4,550. As long as this strong support is not breached, bulls will have more power. In case of breaching and since I see the overall positive sentiment in the market, in the way back, it can be the great resistance to start a rally for a new all-time high.
