Central Banks Stir Market Volatility

Powell's Hawkish Stance and BoJ's Dovish Surprise Signal Turbulent Times Ahead

The markets have spent most of the last year betting on the Fed continuing to loosen conditions and keep liquidity flooding the system. Powell tried to temper expectations when the markets started pricing in 6-7 rate cuts this year. He continued the restrictive message as the year progressed, which unwound some of that dovishness, but that didn’t really do much to perk up volatility or trigger so much as a 5% pullback in the S&P 500. This past week, however, Powell seemed to do a better job of driving this message home and jolted the markets in the process.

The Fed’s hawkish rate cut seemed to finally spook the markets into believing that re-inflation should be taken more seriously. The data is telling us that this trend has already begun and the puzzle pieces are in place to have it continue well into 2025. I don’t think the true Fed narrative changed much post-meeting since Powell has pretty consistently advocated for a cautious approach even as disinflation was in progress. Once the Dot Plot put the forecast for two rate cuts in 2025 in black & white, which differed from the market’s expectation for three, the sell-off was on and the VIX hit its highest level since the August reverse carry trade sell-off. U.S. stocks recovered some of those losses by the end of the week, but it feels as if sentiment took a hit.