Ok, so Jerome Powell has taken a learning-by-doing approach when it comes to communicating with markets and we all know that approach didn’t go so well in 2018.
With apologies to everyone who was rooting for ol’ Jay and his “plain English”, it was an unequivocal disaster and if you doubt that assessment, just take a look at when equities started to crater and credit spreads started blowing out. Spoiler alert: it was precisely when “plain English” manifested itself in “long way from neutral” on October 3.
Obviously, Donald Trump has made things immeasurably worse with his trade war and generalized insanity and the President also made it more difficult for Powell to lean dovish by publicly deriding the Fed, thereby heightening concerns about central bank independence and theoretically making it mission critical for the committee to move ahead with a December hike as a way of defending the institution from undue political influence.
All caveats aside, though, Powell’s communication strategy has been a failure. He underscored that during the December presser, when whatever goodwill he managed to engender with markets by walking back “long way from neutral” on November 28, was summarily wiped out as “plain English” struck again, tanking stocks and setting the stage for Trump to make things worse a day later by forcing a government shutdown.
That was the backdrop for Powell’s “discussion” in Atlanta on Thursday that found him seated beside his predecessors and we have to say, he managed to turn in a pretty solid performance.
Powell began in predictable fashion, emphasizing strength in the data and reiterating that while the market is understandably pricing in downside risks, psychology has seemingly become disconnected from economic reality.
After that, he delivered a long-winded (for him) series of remarks designed to reiterate the notion that Fed policy under his leadership is not on a preset course. This time around, he was some semblance of believable.
He also deftly referred everyone to the 2016 experience when Yellen took a pause, an implicit/tacit suggestion that we could see a repeat of that in 2019. That was a good move.
Further, when asked about the balance sheet, he made it abundantly clear that the Fed can and will adjust the pace of runoff if necessary, remarks that, while generally consistent with what he’s tried to communicate previously, came across as far more convincing this time around. Here’s a summary:
Admittedly, Powell had some cover here thanks to the blockbuster jobs report, but he has variously demonstrated that he is capable of wiping out billions in wealth simply by opening his mouth, so in that regard, Friday was a success.
Have a look:
Further, Powell emphasized that the Fed is not a political entity, going so far as to say that he “wouldn’t resign” if Trump “asked him to.” That’s also the correct answer because remember, as much as markets don’t like Powell (and if that’s not fair, then suffice to say markets don’t like his blunt communications style), they would hate to seem him forced out by an unhinged despot. So it’s nice to know that he would resist that with every ounce of his being.
It’s obviously too early to tell whether Friday morning’s gains will hold into the close, but the initial response to Powell’s remarks suggests folks are infinitely more satisfied with the Fed chair now than they were in December.
Now if he can just duplicate this performance at some of his post-meeting pressers, he might be able to avoid a scenario where he extends his record for most Fed days with an S&P loss.