Welcome to the Chair, Jerome Powell

This article was originally published on Nadex.com.

There's a popular scene in the award-winning Martin Scorsese classic "Goodfellas" in which Billy Bats (played by Frank Vincent) appears to show respect to Tommy DeVito (played by Joe Pesci) by apologizing for a perceived slight. Once all is well and Tommy accepts his apology and toasts him, Billy Bats shouts out the very same slight, "Now go home and get you (expletive) shine box!" This colossal one-line insult set off a chain reaction that ends both of their lives and changes the lives of many other characters in the film, and it kept ringing in my head as the stock market sold off at a pace and depth not seen in years. The selloff started on Jerome Powell's first day as the new Fed Chair. 

Not The Fed's Job

On February 5th, Jerome "Jay" Powell was sworn in as the new Fed chair with a backdrop of low inflation, strong GDP, strong earning's growth and a very solid global economy. Although there had been some signs of wage growth in the payrolls data and a 666 point selloff in the Dow on February 2nd, all looked well for Jay's first day. Then Billy Bats decided to cause trouble in the form of an additional 1,175  points down in the Dow and an 89% spike in the VIX. Now we all know the Fed's dual mandate does not include watching asset prices (wink, wink) but the potential storm this could cause for the FOMC and their rate hike plans was not trivial. A market that started a selloff based on potential inflation fears and a quick spike in rates could hardly afford a continued unwind of monetary policy accommodation, which is exactly what it will be getting in the coming months. Luckily, Jay Powell is not Tommy DeVito and chose not to react in any way. No statement and certainly no action came from the new chair, although there was some calming of inflation expectations by Neel Kashkari, President of the Federal Reserve Bank of Minneapolis and James Bullard, President of the Federal Reserve Bank of St. Louis. 

The Vol Surprise wasn't Surprising

Volatility, as measured by the VIX, is mean reverting and the mean of the VIX has been way too low versus history. up until about 2013, the average close of the VIX was 20, the mean was 17 and the mode (the closing price seen most often) was around 13. over the last 4 years, those statistics have pushed lower and lower and that is not the market's normal state. Some may say the stock move was a healthy correction and some may say it was more sinister but the move in the VIX was proper and flushed out some speculative excess that needed to be flushed out. Chair Powell will definitely need to be on his toes as this plays out or he may find himself back shinning shoes. 

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