Hawkish Powell is a force markets haven’t faced in three years

Jerome Powell’s appetite for a faster tapering of Federal Reserve stimulus is casting him in a role financial markets haven’t seen since 2018: hawk.

Jerome Powell’s appetite for a faster tapering of Federal Reserve stimulus is casting him in a role financial markets haven’t seen since 2018: hawk.

Stocks slid, short-term interest rates rose and measures of equity volatility surged Tuesday after the central bank chairman warned that elevated inflation could justify ending asset purchases sooner than planned. Buffeted also by anxiety around the coronavirus, the S&P 500 just endured its worst stretch of turbulence in more than a year. 

For investors, an urgent question becomes whether Tuesday’s congressional testimony was a watershed moment for the monetary policies that have helped the S&P 500 effectively to double since Christmas 2018. That’s when Powell’s last big pivot occurred -- the dismantling of interest-rate hikes that made the fourth quarter of that year one of the worst for equities ever.

“Not only is he speaking in a more hawkish tone, but he’s dropping major policy implications almost without regard to how the markets may take them,” said Max Gokhman, chief investment officer at AlphaTrAI. “All of the predictability he’s previously tried to cultivate in terms of taper and liftoff scheduling is in question.”

Missing from Powell’s script Tuesday was the sense of deliberation that has defined his message ever since transforming from hawk to dove at the end of 2018.