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Face up to reality

26 Mars 2018 Par Valentijn van Nieuwenhuijzen
Valentijn van Nieuwenhuijzen (Photo: NN Investment Partners)

It was supposed to be the week of the new Fed chairman Jerome Powell. In his first post-FOMC meeting press conference this Wednesday night (19:30 CET) he will comment on the reasons to raise interest rates further towards the 1.5%-1.75% range.

And, probably even more relevant, on what the important nuances are around a central tendency of a rate-hiking march towards a more “normal” 3% over the next two years. 

A new face in charge of the most important central bank in the world, who faces his first public exchange of words with the press on the state of the US economy and the outlook for monetary policy, will always be one of the most important market events of the year.

Nobody’s words have more power to move markets than those of the Fed Chair, and the belief that “fighting” them is futile remains strongly entrenched in investors’ minds. But understanding how to weigh these words, to raise questions on crucial topics, and to learn how to read between the lines of what is being said to reporters is essential for markets in their effort to profile both the character and beliefs of the new Fed Chairman. Much more than the well-telegraphed policy decision to hike interest rates by 25 basis points, it is mostly about the way that Fed Chair Powell will face the reality that the whole world is watching and micro-analysing every single word he says.

How clearly and convincingly he will share his thinking under this pressure determines how quickly the market will trust Powell in being able to keep on steering the economy in the right direction and, as a result, keep support for (risky) asset prices in place. And by awarding the Fed Chair with that trust, the markets hand back a gift to Powell by behaving more calmly and supporting the economy that he tries to manage with easier financial conditions. And by creating this positive feedback loop, the effectiveness of the Fed’s policy approach and Powell’s words to guide markets will increase further. If it all seems like a confidence game, where gaining trust through credible behaviour and convincing storytelling by the Fed Chair actually generates real effects in both markets and the real economy, then I left the right impression. Because that is what actually happens in the real world; our behaviour, the stories that we tell and the trust that others place in us have real effects.

And that is why it might just be different this time around. It might be that this is not Powell’s week and that his press conference will prove not to be the most noteworthy event. In an era where digital technology and social networks are revolutionising the way we behave and communicate, the trust we place in the platforms that they create has become increasingly important for the evolution of our economic system. Therefore, the news that the data of 50 million users of the largest social network in the world was possibly misused by an external data analytics firm to manipulate voting behaviour during elections could well have the power to overshadow the Fed Chair for once.

In the short run, the fallout of a rising threat of increased regulatory scrutiny could easily weigh for a bit longer on the technology sector, which has so successfully pushed global equity markets higher over the last 12 months. Given the popularity of the sector in investors’ minds and portfolios, the marginal buyer of these tech stocks might be hard to find as long as headlines about data leakage continue to swirl around. In the medium term, the more persistent challenge might be that both users and investors have to face the reality that digitalisation and networking platforms have a lot to offer, but also create risks related to privacy, security and transparency that have the potential to seriously undermine trust in these technologies.

And also in digital space more trust leads to stronger effects in the economy. More trust leads to more users and more information/data to be shared. This creates lower costs and higher revenues for the companies involved. It leads to extended integration of these companies into the economic ecosystem, which then creates more innovation and stronger growth prospects. And once the latter becomes visible, trust builds up further and the virtuous cycle starts again.

Until it stops. Until something makes it turn the other way around and a nasty reversal materialises. Will the latest news flow around technology companies create such a tipping point? Hard to say and too early to tell. But at least the network effect seems to be stealing Powell’s limelight for the week and that is telling enough. Central bankers used to be the unchallenged leaders of financial markets, but maybe we have arrived in a reality where machines are catching up on the financial gods of the past.

 

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