Jerome Powell, governor of the U.S. Federal Reserve, listens during a Senate Banking Committee hearing in Washington

Powell’s Tune Changed as Markets Melted Down

(Bloomberg) -- Three weeks ago, it was possible for Jerome Powell to write off the goings on in financial markets as “a little bit of volatility.” Then came the last 10 days of December.

Apparently, that was enough to get the attention of the Federal Reserve chairman, whose pronouncements Friday combined with the best employment report in 10 months to send stocks back into recovery mode. The S&P 500 climbed as much as 3.1 percent, erasing the previous day’s drop.

Powell’s Tune Changed as Markets Melted Down

“Market action for sure was the primary driver,” said Paul Brigandi, managing director at Direxion. “It shows he’s listening to how the market reacts to his comments. There was a hawkish bent on his last comments. There was a sense he wasn’t listening to markets compared to previous periods.”

While bulls celebrated the news, the result was another neck-breaking swing for investors caught between divergent readings on the economy and the future path of Fed stimulus. The S&P 500 has now traded in an intraday range exceeding 2 percent on 15 of the last 21 days, the most since 2011.

Powell’s Tune Changed as Markets Melted Down

Speaking on a panel with his predecessors Janet Yellen and Ben Bernanke at the American Economic Association’s annual meeting in Atlanta, Powell said central-bank policy is flexible and officials are “listening carefully” to the financial markets. Crucially for traders worried about liquidity drains in the economy, Powell also signaled a willingness to consider changes to the Fed’s gradual run-off of its balance-sheet in any policy review.

“The Powell/Yellen/Bernanke show had a simple purpose: re-assure the market that the Fed is not in disarray and that it will act to protect the market on a further downtick than what we saw in December,” said Ilya Feygin, senior strategist at WallachBeth Capital LLC. “The Fed will likely keep rates on hold for a while until it has more confidence in the data.”

To investor ears, anyway, Powell sounded significantly less sympathetic on Dec. 19, the day the Fed raised interest rates for the fourth time this year and evinced only moderate inclination to slow the pace of hikes in 2019. Traders hoping for acknowledgment of their plight heard the chairman say that day that “a little bit of volatility -- speaking in the abstract -- some volatility probably doesn’t leave a mark on the economy.”

The S&P 500 plunged 7.7 percent over the next four sessions, pushing the Cboe Volatility Index to 36.07, its third-highest reading in seven years. Selling snowballed into Christmas as the index came within a few points of its first 20 percent bear-market tumble since the financial crisis.

The drumbeat of losses in stocks did more than convulse markets. Bloomberg News reported on Dec. 22 that President Donald Trump had discussed firing Powell, citing four people familiar with the matter. The news was met with a 2.7 percent slide in stocks on Christmas Eve.

On Friday, the Fed chairman made clear he would not resign if Trump asked him to step aside. He also acknowledged the strength of the December payrolls report, which showed the U.S. added 312,000 jobs while the unemployment rate rose to 3.9 percent. It came a day after a gauge of U.S. manufacturing showed its biggest monthly drop since 2008.

“I’m hopeful that the Fed will start to get the communication a little bit more precise,” said Nancy Perez, managing director at Boston Private Wealth LLC, which manages $7 billion. “But I do think volatility is here to stay this year. I just don’t see how we cannot have it. Because the Fed is only just one part of the equation.”

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Watch the full discussion with Jerome Powell, Janet Yellen and Ben Bernanke.

Also read: Powell Says Fed Can Be `Patient,' Won't Quit If Trump Asks