When Is A Dove Not A Dove? Bullard, Powell Tuesday Tag Team Fails To Inspire

Last Wednesday, Jim Bullard lodged the first dissent of Jerome Powell’s tenure as Fed chair.

Less than 48 hours later, Jim explained, in a blog post, why he believed the Fed should have preemptively cut rates in June.

Pretty much immediately, market participants began to joke that Trump had found his new Fed chair. Then, just hours later, non-voter Neel Kashkari wrote a (much longer) blog post in which he declared that were it up to him, the Fed would have cut rates by 50bp and adopted forward guidance pledging not to raise rates again until core inflation rose sustainably to target.

Needless to say, Kashkari’s post only served to validate expectations for front-loaded cuts, which are now the base case for a handful of banks. The new dot plot shows eight members see lower rates in 2019 – seven of those project 50bp worth of easing.

That was the backdrop against which Bullard spoke to Bloomberg on Tuesday afternoon and, in a testament to just how “doved-up” this market really is, reliable dovish stalwart Jim managed to disappoint markets by saying that while now seems like a good time for an insurance cut, the situation doesn’t call for 50bp worth of cuts next month.

You could see the reaction everywhere you cared to look, but a simple chart of 2-year yields (inverted) and gold is pretty telling.

“It really does look like the market is disappointed by Bullard pouring cold water on the idea of a 50bp rate cut”, Bloomberg’s Sebastian Boyd wrote. “Had markets gotten so greedy as to expect a 50 bps cut in July? It sure appears so”, his colleague Michael Regan mused.

Yes, it does “appear” so. And it appeared that way in stocks too. Equities slipped as Bullard spoke and the dollar spiked.

This is the kind of thing that drives some folks crazy, and justifiably so.

Just step back and think about this for a second. We have now reached a point where the market reads it as “hawkish” when one of the most reliably dovish Fed officials goes on television and effectively confirms that the rate cut he wanted last week is in fact coming less than five weeks from today. How, exactly, is that “hawkish”? Well, because the bare minimum for “dovish” is now a 50bp cut in July. Uber-dovish would be 50bp in July plus some kind of nod to the balance sheet plus enhanced forward guidance.

And all with the unemployment rate at a five-decade low, mind you.

Powell spoke shortly after Bullard and the Fed chair purposefully stuck to the script. In fact, he said his message on Tuesday was intended to be consistent with his post-FOMC press conference. Apparently, Powell is now so worried about moving markets in the “wrong” direction that he feels the need to say, up front, that he’s not trying to say anything that is materially different from what he said last week.

Powell did comment on Fed independence in the face of incessant (and I do mean incessant) attacks from Donald Trump. Specifically, Powell called the central bank’s independence an “important institutional feature”. Somehow, that seems to understate the case. He also said “bad things happen when central banks lack independence”. If you have any questions about that, one contemporary example is Turkey.

Powell also said the Fed is doing its best to serve all Americans and that the central bank has no desire to play any role in “broader political issues”.

“We are human and we make mistakes”, Powell apologized, before noting that he hopes those mistakes won’t ever relate to the “integrity” of the institution.

As Powell spoke, Reuters quoted a senior administration official as saying that Trump believes the dollar is too strong and that had Powell not raised rates, the greenback would be weaker.

The White House has no plans to demote Powell, the official said.

Ultimately, the market’s repricing of Fed cut odds inspired by Bullard’s comment about 50bp being too much was largely reversed. The swaps markets is pricing in 32bp of cuts in July with 77bp of cuts priced into the December meeting.