Does Jerome Powell Want the Stock Market to Crash?

Federal Reserve Chair Jerome Powell visited Congress twice this week, on Wednesday and Thursday, to discuss the current state of the economy and the path forward as it pertains to monetary policy. Powell touched on a number of hot-button issues, including interest rates, bank failures, and the commercial real estate market, stirring financial markets in the process.

Does Powell want a stock market crash?

Well, probably not. The Fed Chair maintained a relatively neutral tone this time around while toeing the line between optimistic and concerned. Powell assured Congress that rate cuts are still on the way while qualifying that members of the central bank still want to wait for more strong inflation data before stepping off the gas.

“We’re waiting to become more confident that inflation is moving sustainably at 2%. When we do get that confidence, and we’re not far from it, it’ll be appropriate to begin to dial back the level of restriction,” Powell told reporters. According to Powell, the rate cuts are timed such that the central bank doesn’t “drive the economy into recession rather than normalizing policy as the economy gets back to normal.”

Financial markets have proved notably volatile in response to Powell’s commentary. After a topsy-turvy week, stocks are down today following Powell’s Congressional testimony Thursday.

The S&P 500 is eyeing a 0.55% loss, while the Nasdaq Composite is on track to lose 1% of its value as the markets take a definitely bearish stance on Powell’s commentary.

Jerome Powell Holds Bearish Stance, Stoking Stock Market Crash Fears

Interest rate traders have long held out hope for a March rate cut, which, unfortunately, seems a long shot currently. Indeed, Powell’s surprisingly hawkish attitude at the first Fed policy meeting in January quickly established that rate cuts may not come till well into the year, disappointing Wall Street investors.

Unfortunately, this week’s testimonies did little to uplift spirits.

“Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require tighter policy to get inflation back to 2%,” Powell said. “At the same time reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

The CME FedWatch Tool currently prices in just a 3% chance the central bank opts to lower rates at the upcoming March 20 Fed meeting. This is likely the primary cause of the stock market’s decline this week.

Interest rates are a major factor in everything from corporate bottom lines to mortgage rates. Higher rates typically result in slower economic growth, higher unemployment, and other generally contractionary economic effects while helping to lower inflation. noted Chief Investment Officer for NorthEnd Private Wealth Alex McGrath, elaborated on Powell’s strategy:

“Fed Chair Powell continued to throw cold water this morning on rate cut expectations for 2024. While maintaining that inflation has fallen dramatically, he continues to indicate that the fight against inflation is not done and that the risks of cutting too early are great.”

Powell Issues Stark Warning on Bank Failures and Commercial Real Estate Industry

Powell also informed Congress of bubbling concerns related to the commercial real estate sector. The Fed Chair told Congress on Thursday he expects some bank failures as a result of overexposure to commercial real estate, which has dropped in value substantially as a result of the transition out of offices to remote work:

“In many cities, the downtown office district is very underpopulated. There are empty buildings in many major and minor cities. It also means that all the retail that was there to serve those thousands and thousands of people who work in those buildings, they’re under pressure, too.”

Powell expects the failures will be limited to mostly small and medium-sized banks but will represent a problem that will likely persist for years onwards:

“It’s not a first-order issue for any of the very large banks. It’s more smaller and medium-sized banks that have these issues. We’re working with them. We’re getting through it. I think it’s manageable, is the word I would use.”

For context, thirty-four banks have failed since 2015, most recently occurring just last year when the Treasury Department jumped into action to prevent the collapse of Silicon Valley Bank and Signature Bank.

While the prediction is inherently troubling, Powell did reassure Congress that financial regulators would manage to contain any damage wrought by potential bank failures, dodging a broader crisis.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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