There was a lot to digest after a speech by the US Federal Reserve Chairman at a conference sent stock markets into a tailspin, but it was less the contents of the speech than the reaction of the markets that raised questions. For several months, now, central bankers in the western world have been explicit about prioritising inflation over economic growth. Chairman Powell’s speech made this same point, although perhaps with a tone of exasperation that had been missing before. Chairman Powell made it clear that the decision on whether to raise rates by a further 0.75% next month, or to drop to 0.5%, had not yet been made, but he also played down the idea that the softer recent inflation numbers would justify any change in course. This was exactly in line with comments he made in June that the Fed would need to see a clear run of lower monthly inflation data for it to change course.

Only two months ago stock and bond markets had cheered the Chairman’s tough talk, seemingly wanting a more vigorous approach to fighting inflation, and perhaps fearing large rate rises now less than uncontrolled inflation and the threat of even larger rate rises further down the road. But this time, as essentially the same message was delivered again, stock markets buckled. Despite its eight-minute length on Friday, the speech triggered such a relentless breadth of selling that the mighty S&P 500 index was turned into what resembled a down escalator on the Elizabeth Line. It took nearly 12 hours of market activity before the index could muster an uptick worthy of mention, by which time it had fallen by 4%, taking global equity markets down with it. Two trillion dollars was wiped off the value of stock markets globally. It did not help that European Central Bank officials promptly jumped on the bandwagon, giving their own versions of Powell’s speech in what was clearly a choreographed message to global investors.

Perhaps the strangest phenomenon observed on the day was the relative disinterest in the speech shown by American bond markets and the US dollar. Two-year US government bonds, which most clearly track the presumed path of near-term interest rates, ended the day only a fraction lower. US 10-year treasuries similarly ended the day flat. They were more spooked by the ECB’s comments over the weekend, which did eventually cause a global bond market sell-off when markets opened on Monday. The dollar managed a slight rally after the speech, but subsequently fell back to its pre-speech level against most currencies.

Where stock markets go from now depends on whether this was just an irrational blip in an otherwise sustained rally, or whether this sudden loss of confidence signals a sea-change in the sentiment of equity investors. The steadiness of bond markets suggests the former, and it was notable that, by some measures, Friday’s sell-off was nothing like as panicky as the behaviour that occurred at the market’s lows earlier this year. But, as has just been proven, stock markets are not known for their reliability in the short-term.