In the hours following the January Fed decision (which was accompanied by not one, but two statements) and Jerome Powell’s subsequent press conference, a stunned Wall Street struggled to find the right words to describe the magnitude of the dovish shift.
“Capitulation” was popular, as was “relent” and “fold”. Of course there were all manner of attempts at humor, some more successful than others (e.g., “Dove show”, “the hawks have left building”).
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‘Capitulation’: What Wall Street Thinks Of Jerome Powell And The Fed
To be sure, Powell did pole vault over an already high bar for a dovish surprise. He had already delivered market-friendly public remarks on two separate occasions in January (here and here) by the time the meeting rolled around and other Fed officials went to great lengths to push the same soothing message. On one hand, then, it shouldn’t have come as that much of a surprise that the January meeting produced an overtly dovish outcome.
On the other hand, there was an argument to be made that because the bar for a dovish surprise was set so high in light of the accommodative slant as driven home on too many occasions to count during the first three weeks of the year, the fact that the Fed cleared it with room to spare spoke volumes about their express intent to reassure markets and help set the tone for global central banks in a world where concerns about growth are proliferating and the reflation narrative is (or at least was) dying on the vine.
Fast forward a few weeks and growth concerns have not abated. The ECB explicitly acknowledged growing downside risks, the BoE is palpably concerned about Brexit, the RBA shifted to neutral, the RBI cut rates and the PBoC is generally expected to keep pushing the envelope on looser policy up to and including a benchmark cut. The more dovish the Fed, the more scope there is for other central banks to pivot in tandem.
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Blue Magic: Addicted Markets Get Fix As Central Banks ‘Resume Race To Zero Posture’
One of the analysts who came across as a bit incredulous at the ferocity of the dovish lean following the January Fed meeting (and that assumes it makes sense to describe doves as “ferocious”) was SocGen’s Omair Sharif whose postmortem was called “FOMC: A Letter of Apology to Markets”. In it, he wrote the following:
The Fed surprised us, and the markets, by pivoting to an extremely dovish stance… For now, we are sticking with our call for two 25bps rate hikes, one in June and one in September, but after today, the risk is clearly towards the Fed hiking only once this year. Frankly, we walked away from today’s meeting and press conference thinking that the onus is now on the data to get the Fed to hike even once this year.
Well, on Thursday, Sharif threw in the towel on that call. In a note called “Putting the Fed on hold”, he revises SocGen’s Fed call as follows:
We have revised our Fed call and are eliminating the two 25bps hikes we had penciled in this year. In addition to the Fed’s own messaging about remaining “patient,” we suspect that the oft-cited cross-currents, along with only moderate inflation, will keep the Fed on hold in 2019. Additionally, we expect the economy to slow later this year, and we do not see the Fed raising rates in that environment.
That’s pretty much all you need to know, but just in case you’re interested in the details, Sharif goes on to say that “the hurdle for further rate hikes increased dramatically in the January FOMC statement [and] the fact that doves, centrists, and hawks have all parroted the same talking points regarding patience is telling and does not suggest another quick pivot to rate hikes anytime soon.” I don’t know if he meant for that to be a witty sentence (putting “parrots” after hawks and doves), but it’ll work.
He goes on to say that the Fed simply isn’t as worried about a pickup in inflation catalyzed by wage pressures as they were previously and he also notes that underlying inflation has in fact cooled recently.
“Finally, Fed-speak has turned from talking about an inflation ‘overshoot’ to characterizing inflation as being ‘muted'”, he adds, before reiterating the idea that if SocGen’s forecasts pan out, the US economy will slow to “noticeably below the Fed’s expectations” by the end of the year.
So, there you have it – why SocGen is “putting the Fed on hold”.
As far as the implications for equities are concerned, we would again remind everyone that in the current environment, incremental dovishness (i.e., the Fed getting more dovish from here) would likely entail a sharp slowdown in growth which wouldn’t be the best news for risk assets. On the flipside, better-then-expected data could put Fed hikes back on the table, which would be a headwind to the extent it started to tighten financial conditions again.
That’s the “damned if you do, damned if you don’t” take.
A more optimistic assessment entails a soft landing for the US economy paired with a benign resolution to the trade conflict and a Fed that’s just dovish enough to placate markets, but not so dovish that Powell ends up “confirming” fears about an acute economic deceleration.
