Jerome Powell’s odds of skating through the March FOMC press conference unscathed were long.
There was quite a bit at stake, and Powell isn’t a particularly good communicator. He’s affable enough, sure. But he has, in the past, demonstrated a propensity to say the “wrong” thing or, worse, commit sins of omission by sticking too close to the script, perhaps due to some lingering PTSD left over from 2018’s infamous “long way from neutral” debacle.
Somehow, though, he managed to turn March’s overhyped proceedings into a mundane affair. Frankly, it just didn’t feel like journalists and other members of the media had much in the way of ammunition despite the cornucopia of hot-button issues.
The statement itself was nearly unchanged from January, and the while the median dot for 2023 stuck, more officials now project higher rates in 2022 and 2023 versus December. Inflation forecasts moved up, but the projections show officials believe any overshoot is likely to be fleeting.
Powell was asked repeatedly during the press conference about the dots and whether the growing number of officials who see rate hikes signals any shift in the Fed’s thinking or reaction function. He simply refused to take the bait.
While Powell generally read from the same script, he didn’t come across as overly robotic. “People will have a range of assessments for how good the economy is going to be. You’re going to have different perspectives,” he said. “It isn’t meant to pin down a time to liftoff.”
Adopting a colloquial cadence, Powell continued. “Sometimes with the dots, I have to be sure to point out that they are not a committee forecast,” he emphasized. “It’s not meant to be a promise or even a prediction of when the committee will act.”
Everyone in attendance (virtually) knew that, of course. So, Powell’s reiteration wasn’t actually a “reminder.” Rather, it was an expression of mild frustration with being asked the same question over and over again by people who already know the answer.
In what amounted to a journalistic Hail Mary pass, CNBC’s Steve Liesman tried to get Powell to say what level of 10-year yields would prompt the Fed to intervene in order to cap rate rise or otherwise take control. Powell would have been forgiven had he simply said “next question.” Liesman was effectively asking him to pre-commit to WAM extension, yield-curve control, or a combination of the two at a specific level on 10s. “Our policy remains appropriate. We’ll maintain that until the job is well and truly done,” Powell responded.
Liesman tried again, asking specifically about a new Operation Twist. “The tools we have are the tools we have,” Powell snapped. He steadied himself. “The asset purchases in their current form, across the curve, we think that’s the right place. We can change them in a number of different dimensions if that’s appropriate.”
A recurring theme was Powell’s insistence that average-inflation targeting isn’t credible if realized inflation doesn’t rise above target. That’s self-evident. You can’t call a policy that hinges on overshooting a target a “success” unless you actually do overshoot the target.
“Talking about inflation is one thing. Getting inflation to overshoot is the real thing,” Powell insisted. “We want to perform. When we’re actually above 2%, we can talk about this.”
“The fact the liftoff timeline was held steady despite a sharp improvement to the 2021 real GDP estimates, higher inflation forecasts, and an even stronger jobs market also serves to reinforce the Fed’s commitment to the new framework,” BMO’s Ian Lyngen and Ben Jeffery said Wednesday afternoon. “In outlining a scenario of such optimism while still keeping policy rates at the lower bound, the FOMC is offering a glimpse at ‘the new Fed’; whereas those investors anticipating rate hikes were poised to be brought forward parallel to eurodollars were operating under the assumption the Fed would respond as quickly to higher consumer prices (or expectations) as it has in the past,” they added, noting that “at its essence, the Committee’s new framework is attempting to trade a small amount of inflation fighting credibility for a large degree of inflation creation credibility (or deflation fighting).”
Asked about SLR, Powell said an announcement is coming “in the next couple of days.” He wouldn’t front-run that. At all.
In a note dated Monday, the incomparable Zoltan Pozsar said everyone fretting about the SLR extension is wrong. To wit:
The market assumes that the SLR exemption is what has “glued” the rates market together since 2020, and that the end of exemption means that large U.S. banks will have to sell Treasuries. That view is wrong: if the SLR exemption ends on March 31st, that won’t lead to forced sales, neither will it cause a constraint on the functioning of the Treasury repo market. Where are most of the exempt reserves and Treasuries booked? Close to 90% of the exempt reserves and Treasuries are booked at G-SIBs’ bank operating subsidiaries. Broker-dealer subsidiaries hold only about 10%. Put differently, the pandemic-driven surge in reserves and Treasury holdings occurred in bank portfolios, not in dealer inventories. Second, what will happen to bank portfolios if the SLR exemption ends? Nothing. The exemption of reserves, Treasuries, and net repos from the SLR was optional at the bank operating subsidiary level, but the major banks did not opt in because they didn’t want to get tangled up with the strings attached –seeking approval from regulators prior to making capital distributions from the bank operating subsidiary to the holding company in exchange for an exemption. Put differently, the exemption of reserves, Treasuries, and repos never happened at the bank operating subsidiary level, so when the “option expires” on March 31st SLRs at the bank operating subsidiary level won’t change at all.
You can take that for what it’s worth. I’d just state the obvious, which is that Pozsar is held up as a kind of unassailable authority when it comes to debates that fall within his purview. His note briefly moved markets Wednesday.
Coming quickly back to Powell, he said it’s “sad to see” progress on reducing African American and Hispanic unemployment eroded by the pandemic. He reiterated the Fed’s commitment to fostering inclusivity, which is another nod to dovishness.
On fiscal stimulus, Powell rolled out a recommendation dressed up as a comment from an unbiased observer. “It’s not up to us to tell Congress how much to spend,” he said. Rather, all he’s trying to do is communicate what fiscal policy can achieve. It can “invest in future productive capacity and raise potential growth,” Powell mused. Whether or not those are goals worth pursuing is up to Congress.
Prior to the statement and press conference, 30-year yields hit the highest since August of 2019, when Donald Trump escalated the trade war with China, triggering a growth scare that inverted the 2s10s.
10-year yields reached 1.687%, the highest since January of 2020, when COVID-19 was still just “a mysterious virus spreading rapidly in China.”
Following the statement, and as Powell spoke, yields backed off and stocks rose, eventually closing higher on the day.
The dollar, meanwhile, fell (figure below) as yields were lower out to the five-year.
It’s certainly tempting to suggest Powell threaded the needle, although not everyone will see it that way.
“Powell has done nothing to talk down long-term yields,” Wells Fargo said. “The combination of a tolerant Fed and massive Treasury supply will continue to push yields higher, in our view” and the dollar’s drop “may not last.”
Some spoke of a “Draghi moment” after Powell committed to supporting the US economy for “as long as it takes.”
Asked if it’s time to “start thinking about thinking about” tapering asset purchases (an allusion to Powell’s June 2020 quip about the Fed being nowhere near having a conversation about tightening policy), Powell chuckled. “Not yet,” he said, adding that the Fed will give the market “as much advance notice as possible.”
That’s the recursive nature of forward guidance. You commit to giving advanced notice, but that advanced notice then itself becomes the event. That, in turn, means you need to provide notice for the notice. And so on to infinity. Or insanity. Whichever comes first.