The reactions continue to come in re: Jerome Powell’s testimony on Capitol Hill and as noted on Tuesday evening, the consensus here is that it was a notable (if inadvertent) hawkish surprise.
The reaction in Treasurys yesterday clearly indicated that the market wasn’t prepared for Jay’s comments with regard to how the incoming data have affected his own view about progress on the inflation front.
This is likely to weigh on risk asset sentiment from now until the March meeting although that comes with the usual caveat about not underestimating the propensity of investors to revert to the Pavlovian BTFD mentality which, judging by the V-shaped charts from February, is still deeply ingrained.
Goldman is out with their take and it’s the same story. “Powell presented an upbeat take on the economy and noted that his outlook has improved incrementally since the FOMC’s December meeting, a comment that sparked a sell-off in the Treasury market and appeared to raise the odds of an upward move in the Fed’s dot plot at the March meeting,” the bank writes, adding that “most investors appeared not to have anticipated that Powell would both acknowledge the incrementally better news and link it to the FOMC’s projections for its policy rate so soon and so straightforwardly.”
“So straightforwardly” is the key word there.
As I put it elsewhere, “[his comments] probably seemed innocuous to some investors, but if you follow this stuff closely you knew that was a mistake as soon as he said it – especially the bit where he says his own view is that inflation is moving up to target.”
While Powell’s comments raise the odds that he and other FOMC participants will shift their dots up in March, where the median dots will settle is less clear. The end-2018 median dot is a very close call and at this point we see roughly even odds that it will show 3 hikes (2.125%) or four hikes (2.375%). Our interpretation of the December dots suggests that a shift from a three-hike to a four-hike baseline would require four participants to move up and for new Richmond Fed President Thomas Barkin to project at least four hikes in 2018 in his first submission. A recent comment from President Kaplan, shown in the table in the appendix, suggests that he is still at three hikes, meaning that four other participants would have to move up. We take Powell’s comments to indicate that he is likely to move, and the decisions are likely correlated.
There you go. So while there’s the usual ambiguity, the upside Fed risk just got a little more upside-ish.