Jerome Powell came into the January Fed meeting holding the all-time record for most consecutive Fed decision days with an S&P loss.
That amusing stat garnered quite a bit of attention last month after ol’ Jay fumbled what we now know (thanks to the December minutes) was an easy handoff in the post-meeting presser.
Long story short, “plain English” struck again on December 19 and at the worst possible time (i.e., the day before Donald Trump decided to force what would end up being the longest government shutdown in history). And so, Powell’s increasingly dubious legend grew.
He made amends on January 4 and with a little (read: a lot) of help from Clarida and friends, managed to engineer a rousing risk rally to start the new year.
The problem headed into Wednesday was that the bar was set pretty high when it came to over-delivering on the dovish side, especially for a Fed chair who was 0-7 in the only 7 “games” he’s played since taking the reins from his predecessor.
Well, suffice to say Powell brought a pole to Wednesday’s hurdle race and vaulted over what everyone thought was a high bar with about 10 feet to spare. As documented here in the minutes after the statements (plural) crossed, Jay stuck the landing on the notoriously difficult “aggressive dovish pause against already dovish expectations” floor routine (and now we’re just mixing Olympics metaphors at random).
In the course of removing the reference to further gradual rate increases, the Fed appeared to indicate that March was a non-starter for an additional hike under any circumstances – the “patient” characterization rules it out. Period. Additionally, you could very well make the argument that merely saying “future adjustments” opens the door to rate cuts. Throw in the acknowledgement of market-based measures of inflation compensation moving lower and you’ve checked all the dovish boxes.
“The statement removed all guidance implying that the next move in the policy rate will be higher”, BMO’s Jon Hill wrote, adding that “it’s not necessarily ‘pause then continue hiking’, it’s ‘maintain and see’, with the next move dependent on incoming data and economic developments.”
“On the balance sheet, the groundwork is now explicitly laid for a 2019 taper, and possibly cessation of runoff by the end of the year”, he added.
On the balance sheet, the Fed’s “special” statement was, well, something “special” for salivating markets. This, right here, is what everyone wanted to hear:
The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.
“The market has latched onto the Fed’s statement that it is prepared to adjust any of the details for completing balance sheet normalization”, Nomura’s George Goncalves (whose name has come a lot lately in discussions about the future of the balance sheet) told Bloomberg in an e-mail exchange, adding that “the Fed is not only being patient, but is super-sensitive [to financial conditions].”
The knee-jerk reactions across markets were obviously dramatic. Stocks, which were already well on their way to a solid session, surged.
The dollar dove with 2-year yields.
The curve aggressively bull steepened.
And gold surged on the overtly dovish outcome.
Meanwhile, the EM ETF exploded to the upside. EM equities were already on track for their best month in a year and the ETF is now gunning for the 200-DMA.
There was no “fumble” in the presser, either. Tone deaf Powell is now gone, replaced with a guy who has figured out how to turn “plain English” into “plain dovish”, which, in hindsight anyway, was predictable (if “plain English” is especially pernicious for risk assets when Powell is hawkish, you can expect it to be especially blunt on the bullish side when he’s dovish).
You really couldn’t ask for a much more market-friendly set of presser soundbites than those listed below, especially in light of what everyone had just read in the statements by the time he got started (i.e., there was no effort to talk the market back once things were off to the races).
Ultimately, this was the best day for stocks since Powell’s January 4 remarks in Atlanta and the second best day since the December 26 rally.
The dollar is now sitting at a four-month low (which, again, is great for EM and only adds to the looser financial conditions impulse from soaring equities).
The high yield junk CDS index surged to what looks like the highest since early November.
And it just goes on, and on, and on.
The bottom line is that Powell appeared determined to snap his 7-“game” losing streak when it comes to Fed decision days ending in tears for risk assets. Unfortunately for Jay, it’s highly unlikely that any subsequent Fed chair will ever come close to tripping up the S&P on 7 straight decision days, so it’s a record he’ll probably hold forever.
Now the only question is whether the trade talks and/or Trump’s ongoing threats to shutter the government (again) if he doesn’t procure $5 billion for his “slat fence” by February 15 will end up negating the good vibes.