The Federal Reserve Bank met last week and did exactly what all the market participants expected: raised interest rates another 0.25 percent. Markets took it in stride and even started to rise…then Chairman Jerome Powell had his press conference, and all hell broke loose.
I think it would help Mr. Powell if he read Proverbs 17:28 before having another press conference: “Even fools are thought wise if they keep silent, and discerning if they hold their tongues.” Alas, the fools just can’t help themselves, and they talk.
Powell did two foolish things, in my opinion. First, he started with a statement about the soundness of banks. He said that “conditions in that sector have broadly improved since early March, and the US banking system is sound and resilient.” This comes just a few days after First Republic failed, having to be rescued by the FDIC and taken over by JP Morgan. I’m sure that Powell’s comments are truthful, and if we knew everything that the Fed knows, we would see that. However, the public impression is that he is delusional.
His second mistake was simply appearing unsure of himself. Who knows why, but he seemed anxious. Leaders must never seem anxious. One problem the Fed continues to have is that they apparently do not understand that economic behavior is at least 70 percent psychological; when a visibly nervous Fed chair says that banks are doing great, everyone who sees him is going to think he is hiding something. Bank stocks get hammered, which is exactly what is happening.
Some helpful tips for Mr. Powell. First, when things are going poorly, the wise thing to do is recognize that right from the beginning. Don’t try to make it seem like everything is okay when it obviously is not. Tell the truth: things are tough. Then, explain why they will get better. Recognize that a bank just failed, then explain why you believe it is likely the last one to do so and that the worst is behind us, assuming that is what he meant by the system being “sound and resilient.”
Additionally, admit that it is time to pause. I believe they left the statement out because they are worried about having to then break their promise. They should stop painting themselves into corners like this, but since they insist on having press conferences, just tell the truth – we anticipate that a pause is in order, although no one knows the future for certain and things may change. Is that so hard? Instead, he has left the impression that they are going to rise again, no matter what. Most, myself included, believe raising this time was a mistake, but they almost had to do it, because they forecast that they would. Stop doing that! Project wisdom by keeping your mouth closed.
Meanwhile, in the actual economy, 79 percent of companies have reported better-than-expected earnings, with 74 percent beating on revenues. That is significantly better than the normal 73 percent that beat expectations for earnings and miles above the 63 percent that beat on revenue. Earnings have come in more than 3 percent better than forecast; that might not sound like much, but that is huge. The real world remains a much better place than Wall Street wants to admit. This isn’t helping stocks at the moment, but it is what matters long term. That is encouraging.
Banks have reported and are doing just fine, which one would never know if he just listened to the media or looked at stock prices. Two poorly run banks going out of business does not mean there is a system-wide crisis. However, as I have said before, a bank crisis is always just one panicked mob away from happening. The media and short sellers are doing everything in their power to make this a crisis, and they could succeed if people fall for it. This is why the last thing we need is an anxious-looking Fed chair. What we need is for Powell to connect with his inner Franklin Delano Roosevelt and remind us that, “The only thing we have to fear is fear itself.”
Panic is never a wise strategy. This too shall pass. Prudent investments will come through in the end. The Fed’s actions are not hurting the economy anywhere nearly as badly as is feared; the speeches, however, are killing us. Please, Mr. Powell – just do your job and for goodness’ sake, stop talking.
Warm regards,
Chuck Osborne, CFA
Managing Director
