‘Muddled And Confusing’: Analysts Pile On After Powell Triggers Biggest Curve Flattening In 16 Months

A quick look at an intraday chart of the dollar and the 2s10s is really all you need when it comes to assessing whether Jerome Powell succeeded in communicating effectively with markets.

Spoiler alert: He did not.

In fact, Powell managed to accidentally trigger the biggest one-day flattening in the 2s10s since March of 2018, which simultaneously conveys disappointment and a lack of faith in the effectiveness of Wednesday’s “insurance” cut at prolonging the expansion in the face of mounting global headwinds and acute geopolitical uncertainty.

Powell’s characterization of the July cut as a “mid-cycle adjustment” did not go over well. It was accompanied by very little in the way of conciliatory language and nothing in terms of the kind of “wink, wink” forward guidance and nuance which signals to traders that policymakers understand the need to avoid disappointing expectations.

Donald Trump wasn’t happy. “As usual, Powell let us down”, the president said.

Early last year, we suggested that Powell’s “plain English” would paradoxically be confusing for markets. It would be less transparent, not more, we said. After all, the two-way communication loop between markets and central banks that helped keep volatility tamped down was predicated on reflexivity. The combination of ambiguous data and a collaborative approach to interpreting that data involving both the Fed and markets, meant policymakers and market participants were always on the same page. Hence: Total transparency.

Powell’s “Plain english” was the opposite of that. Through December, he took an approach that essentially entailed stating the obvious (i.e., the US economy is doing well) and then proceeding with policy tightening based on that. There was no room for the market in Powell’s “plain English” strategy. There were just the rules, the data that went into those rules and the implications of that naive approach for rate hikes. Eventually, he crashed the market.

Now, he’s trying to justify rate cuts despite still strong data, using the same “plain English”. The result was today’s bewildering mess of a presser. If he’s not careful, he’ll crash markets again. Positioning in rates is too lopsided to cope with the kind of rollercoaster that Jay precipitated on Wednesday afternoon. Consider this amusing recap from BofA’s Mark Cabana:

The rates market interpreted the FOMC communications as hawkish with front end rates rising 4 bps and the 2s10s curve flattening 8 bps. The rates market was quite volatile during Chair Powell’s press conference as it saw mixed signals on the outlook for policy. The market initially sold off on Chair Powell’s comments that the rate cut today is “not necessarily” the start of a prolonged rate cutting cycle and that the action today was a “mid cycle adjustment”. However, rates then reversed some of this move after Chair Powell suggested he didn’t think there would be only one rate cut in this mid-cycle adjustment. Overall, the rates market interpreted Chair Powell’s press conference as sending a muddled and confusing message on the outlook for the fed funds target rate and one that disappointed market participants hoping for a more clearly dovish signal.

Yes, “muddled and confusing” indeed.

In their own postmortem, BNP has a section called “the perils of press conferences”.

“While markets were initially placid, volatility picked up when Chair Powell said that the cut ‘is the right move for today’, signaling the possibility for this to be the last cut of the cycle, and subsequently characterized Fed policy here on out as a ‘mid-cycle adjustment'”, the bank writes, recapping. If you ask BNP, “Powell’s intention was likely to retain some optionality on policy and not get increasingly locked into delivering further cuts regardless of incoming data or developments”.

That’s undoubtedly true, but to say he didn’t stick the landing would be to give him way too much credit. Of course, you can’t completely blame Powell. Part of this is on Trump for sowing all manner of chaos in an effort to compel the Fed to cut and then going out of his way at every possible opportunity to draw the public’s attention to how badly America needs looser monetary policy. You would have to be deliberately obtuse to suggest Trump’s actions haven’t had a psychological effect on the Fed and especially on Powell.

BofA went on to describe Powell’s forward guidance efforts as “bumbling”. The bank ultimately sticks to their call for marginally lower rates and a steeper curve, but Cabana notes that “today’s muddled communications make us less confident in the near-term steepening pressure”. At the end of the day, BofA says “the market will need clearer signals before it can believe the Fed will truly act to recalibrate policy to a more accommodative stance”.

For his part, Trump was still talking about Powell on Wednesday evening. “Experts stated that the Fed should not have tightened, and then waited too long to undo their mistake”, the president said, before quoting Fox anchor Lou Dobbs who apparently quipped: “Mistake, Powell cut rates and then he started talking”.