Powell underscored that rate increases must be underpinned by a stronger economy, and was firm that a fourth rate hike would be appropriate if conditions warrant it. Important for market participants was his comment that the committee hasn’t seen signs that the U.S. is on “the cusp” of accelerating inflation, although inflation is expected to recover during the second quarter.

He stressed the need to balance two risks: one, raising rates too quickly and pushing inflation below the Fed’s 2 percent target, and two, raising rates too slowly and having the economy overheat, thus forcing the Fed to raise rates quickly and causing a recession. “We’re trying to take the middle ground … gradual increases in the federal funds rate.” The rate hike at the March meeting was “another step in gradually scaling back monetary accommodation.”

The Wall Street Journal in its editorial following Powell’s first FOMC meeting said, “The bottom line is that the Powell Fed is continuing on the path set by predecessor Janet Yellen, as widely expected. Mr. Powell isn’t showing much leg regarding his own monetary philosophy, as he hasn’t throughout his tenure as a governor since 2012. He will be tested, but not yet.”

Q2 LOOK AHEAD: THE MARKET ENTERS A PERIOD OF CROSSCURRENTS

To say that volatility has made a comeback in this new regime is an understatement. Nearly dormant in 2017, 2018 ushered in a spate of market selling with the proverbial “buying on the dip” that we became so accustomed to, requiring deeper dips and more selective buying. Indeed, calls for the return of “active” management seems increasingly realistic.

With interest rates being one of the major pillars, if not the major pillar, behind the rationale of buying equities, the transition from zero-interest policy to a more normal rate environment will put the market more at risk for bouts of volatility.

The market will be as data dependent as the new Fed chairman. The 10-year Treasury yield has been flirting with 2.9 percent much of the first quarter, and it, along with the 2-year Treasury yield, will be a guide to the path of the economy and, of course, the Fed. Crossing 3 percent and managing to stay above that level could trigger volatility as markets adjust for more hawkish statements from Fed officials.

Not only are higher rates a concern, but the Fed has also been unwinding its balance sheet, and the pace of the “QE Unwind” moves up from $20 billion a month in the first quarter of 2018 to $30 billion in the second quarter, followed by $40 billion a month in the third quarter and $50 billion a month in the last quarter of the year. The unwinding began in the third quarter of 2017 with $10 billion a month. While accommodation and liquidity remain healthy for markets, any difficulties resulting in the “unwind” could also spur bouts of volatility.

The cost of capital is increasing and discussion has begun regarding the LIBOR-OIS spread, with concerns over the widening spread sparking comments that this is indicative of potential problems within the banking system. Many seasoned analysts, however, have observed that the widening spread has more to do with mechanical supply/demand issues. Still, there’s an ongoing tug-of-war as to whether or not the economy can handle this year’s series of rate rises as the Powell Fed ushers in the next phase of the regime change.

Earnings expectations continue to be revised upwards on both the top and bottom lines. Given the strength of earnings reports over the last year, it’s hard to remember that the earnings recession didn’t end until the third quarter of 2016, when we finally saw year-over-year growth following five quarters of contracting earnings. As the global economy improved and demand picked up markedly, top-line revenue growth returned in earnest. Expectations are that earnings should remain supportive for markets, and with the U.S. dollar still competitive against the currencies of our trading partners, market conditions are constructive.