Do you expect the stock markets to react negatively to the Jackson Hole speech of Jerome Powell?

The Powell speech came in on Friday after the Indian markets had closed. However, the Dow fell over 1,000 points and the NASDAQ fell close to 500 points on Friday after the speech hinted at sustained hawkishness. Indian market reaction will have to be gauged on Monday but the SGX Nifty trading is hinting at a 220 points gap down opening on the Nifty. So, the undertone is going to be weak. At least the opening reaction will be weak, although it is early to judge how the markets will react after that. But it is time to be contrarian.

However, behind this knee jerk reaction is the reality of the bigger picture. The Powell speech has given clarity like never before. We know for sure what the Fed is thinking and that they would put the credibility of the Fed above all else. In short, the focus will be only on price stability. The Fed has also clarified in no uncertain terms that if it had to choose between growth and inflation control, it would opt for the latter without blinking an eyelid. Now there is clarity on how long the Fed will be hawkish; till inflation gets to 2%

Let us look at more pragmatically. In the last 5 months, the Fed has hiked rates by 225 basis points. However, the second estimate of the US GDP shows that the GDP contraction in the second quarter in the US is lower than the first quarter. Also, once inflation is controlled, it directly contributes to the growth in real GDP. This is in stark contrast to the RBI monetary stance which is still trying to unwind monetary accommodation without impacting growth. You need to either run with the hares or hunt with the hounds.