Federal Reserve Chairman Jerome Powell has been a reluctant sparring partner for U.S. markets, hired to stand in the ring, don the heavy gloves of rate hikes and trade jabs with the world's largest economy in order to help ensure it's in fit and fighting shape.
He's done well, it has to be said: keeping rates low but nimble enough to react quickly to the Covid pandemic and reaching deep into his corner's crate of tools to snuff-out concerns from a series of regional bank failures earlier this spring.
He's also been forced, and it's always seemed, unwilling, to deliver the odd haymaker to an economy that simply won't go down: A series of 75 basis point rate hikes, a cumulative 5.25% in policy tightening since March of last year and billions and billions of bonds hived off the Fed's holdings and sold back into a bond market already bloated with new government borrowing to finance record deficit spending.
Yet blow after blow, jab after jab — including the odd gut punch — have failed to put the U.S. economy onto the canvas.
Sure, second quarter GDP was revised modestly lower this week, to a gain of 2.1%, but the Atlanta Fed's real-time tool suggests a current growth rate of 5.6%, the kind of advance most G20 economies would sell the family silverware to achieve.
Job growth is slowing, but it's still pretty solid, with another 187,000 positions added last month, mostly in the private sector, with wages still growing at just ahead of inflation despite big new pay deals for United Parcel Service, various pilots' unions and an upcoming negotiation between the Big 3 automakers and the United Autoworkers' Union.
Powell, as sparring partner, continues to dance around the ring, testing the economy's legs with hawkish comments on rate hikes, concern over tightness in the labor market and the need to see more convincing data before he's ready to believe inflation is really and convincingly headed back to the Fed's 2% target.
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But the recent punches have been lighter, and more glancing, perhaps reflecting some weakness in the economy's knees, with Powell not wishing to accidently thump the economy down on the mat with a careless uppercut.
Markets are sensing that concern, as well, with Treasury bond yields both indicating that the Fed is likely done with its rate hike cycle: 2-year notes are now trading at 4.867%, nearly 40 basis points south of the Fed's current benchmark lending rate of between 5.25% and 5.5%.
Longer-dated yields are moving lower, too, but for different reasons: traders are buying bonds (which takes prices higher and yields lower) in an effort to hedge against weakening growth risks.
Some of those risks, such as the end of a moratorium on student loan payments, which could take as much as $100 billion from retail sales over the next year and trim overall GDP by a full percentage point, have a longer lag.
Others, like the recent leap in gas prices, are more immediate: Energy Department data shows the average August gallon was up 6.5% from July, at $3.954 per gallon, and $4 is likely on the way now that OPEC cuts and hopes of a China recovery are pushing global crude prices back above $88 per barrel.
Either way, the force of Powell's rate hike punches are starting to leave a mark — however gently — on the face of the U.S. economy.
September isn't always the kindest to weakened markets, either, and the combination of muted risk sentiment, bond market volatility, softening jobs data and a pullback in consumer spending isn't likely to inspire confidence.
Related: ADP employment report shows softer job growth, slowing wage gains
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CFRA data suggest the average September decline for stocks is 0.7%, going all the way back to 1945, making it the worst month of the year for U.S. stocks. And that's coming off an August slump that clipped 2.2% from the S&P 500 and a deeper 2.4% for the Nasdaq.
Thankfully, like the economy, both benchmarks are still looking fit and trim — the S&P 500 is up 18% for the year. Earnings are likely to grow in both the current quarter and over the final three months of the year.
That puts Powell in his typical sparring stance: on his toes and throwing testing jabs, but pulling the real punches over the next several months until the data does what the Fed could not.
Stop the economy in its tracks.
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