On day one, markets are already putting Fed Chair Jerome Powell to the test.
Market volatility, largely absent until last week, picked up in the final days of Janet Yellen’s tenure, with interest rates suddenly breaking out of a long-running range. Long dormant, inflation expectations suddenly started to rise and triggered a sell-off in the Treasury market.
Yields, which move opposite price, shot higher, spooking stocks. The Dow, after a bruising 666 point loss Friday, was sharply lower Monday in volatile trading, dropping more than 1,500 points at one point before coming back.
The market action can’t all be blamed on Powell’s ascension to Fed chair, but he will have little or no honeymoon period before being expected to raise interest rates and continue the unwind of the Fed’s balance sheet. Yellen didn’t raise interest rates for nearly two years into her term, but then did hike five times as well as initiating the program late last year to scale back the Fed’s massive balance sheet.
“There’s a confluence of factors, one of them being we have a new Fed chair,” said Ward McCarthy, chief financial economist at Jefferies. “There was the feeling Janet Yellen would always bail out the market. That was the notion during her tenure. Powell seems more inclined to let markets do what they do.”
But in fact, the S&P 500 has fallen on the first days of the past couple of Fed chairs. Powell’s first day on Monday coincides with a 2.3 percent drop as of mid-afternoon. The index fell 0.9 percent on Yellen’s first day, and it was down 2.2 percent on Ben Bernanke’s first day.
Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management, said he does not believe the market sell off has anything to do with Powell’s appointment. “It could add some uncertainty but it’s not like anything we haven’t known about,” he said.