Why Jay Powell refuses to be bullied by Wall Street
It’s perhaps fitting, then, that Wall Street’s fleeting moment in the meme zeitgeist comes to a close just as the investing crowd is getting thoroughly put in its place by Certified Nerdy Dad and Federal Reserve Chair Jerome Hayden Powell.
Here’s the deal: On Monday, as global stock market turmoil spilled over into the US, investors were crying out for the central bank to do something drastic, something it hasn’t done since the start of the pandemic in 2020 — call an emergency meeting to slash interest rates and stanch the bleeding on Wall Street.
Powell’s response was a classic dad move: Ignore the screaming toddler and let the tantrum run its course.
The whole episode underscored a fundamental tension between the Fed, which is focused on economic stability, and Wall Street, which is focused on profit.
The two institutions need each other. They’re part of a big family that keeps commerce flowing in the world’s largest economy. And, like most families, they rarely agree on what to do, and they sometimes hate each other.
Stock traders and analysts aren’t shy about complaining when the Fed isn’t moving on their preferred timeline. The Fed, for its part, stays largely out of the muck of name-calling. But Powell, in particular, has a knack for the sarcastic retort.
Last week, he told reporters (more or less) that the pundits can shout all they want on CNBC and it won’t matter one lick to the grown-ups making policy at the Fed.
“We follow the many commentators who bless us with their commentary,” he said. “But we don’t change anything in our approach.” (That’s what counts as a scathing critique in Powell’s buttoned-up briefing room.)
The message from Powell and other policymakers is clear: We won’t be strong-armed by Wall Street. It’s not surprising coming from Powell, an avowed Paul Volcker fanboy who has praised the former Fed boss’s unflinching approach to fighting inflation (even when it meant triggering two recessions).
Powell’s stance is a stark contrast with the scene playing out in Japan. In short: The Japanese central bank last week raised interest rates for only the second time in 17 years, and its top policy official rattled investors by hinting at more to come.
A week and one giant stock market correction later, the Bank of Japan sent out another official to walk back those comments and try to calm investors.
The BOJ’s deputy governor, Shinichi Uchida, citing volatility in financial markets, said the bank would not raise its policy interest rate as long as markets remain unstable.
And just like that, Japanese stocks surged.
Parents of all stripes know the hazards of rewarding bad behavior. In the BOJ’s case, Uchida’s comments illustrate a problem central banks have found themselves in for the past two decades, according to economist Mohamed El-Erian.
Writing for Bloomberg on Wednesday, he wrote that central banks have repeatedly “attempted to take the difficult but necessary steps to deal with economic and financial imbalances, only to fold under market pressure ... The pause that the BoJ felt forced to adopt is likely to eventually conflict with the country’s economic well-being,” El-Erian says.
Powell (formerly in finance, hazel eyes, great ties) appears to have a real opportunity to Volcker it up even more in the coming weeks.
Markets have rebounded, quieting calls for an emergency rate cut, and Powell isn’t due to speak publicly until his (always closely watched) address at the Jackson Hole summit, which starts August 22.
That gives Wall Street plenty of time to sit in the corner and deal with its feelings.
In this context, the business of Wall Street and the stock market are closely tied to the actions of the Federal Reserve, particularly Chair Jerome Powell. Given Powell's stance on not being swayed by market pressures, some might argue that it's essential for businesses on Wall Street to adapt their strategies accordingly, as the Federal Reserve's primary focus is on economic stability. Additionally, the reactions of central banks like the Bank of Japan to investor pressure can significantly impact global financial markets, providing an example of how business decisions can be influenced by these regulatory bodies.
