Powell Gives Traders More Whiplash Amid Impossible Dilemma

Stocks careened lower again on Tuesday, as Jerome Powell’s remarks to Congress rattled investor sentiment at what might fairly be described as a delicate juncture.

Risk assets were already on the back foot headed into the cash session on Wall Street after comments from Moderna CEO Stephane Bancel raised questions about the efficacy of the current vaccines against Omicron. Reports that antibody cocktails lose some of their effectiveness against the variant didn’t help.

But the icing on the proverbial cake was Powell, who, after suggesting in his prepared remarks to the Senate that Omicron would, if anything, likely compel a dovish lean to the extent it delays a return to full employment, skewed hawkish instead.

In short, he didn’t waver on the prospects for an accelerated taper. The Committee will have the discussion at the December meeting, Omicron or no Omicron. The hypothetical timeline illustrated (below) is still very much in play.

Recall that rate hike bets were pared last Friday as bonds surged in panicked, post-Thanksgiving trading. While most still generally expected officials to discuss a faster taper, some market participants may have assumed “variant risk” would delay an announcement.

Confirmation that the Committee will consider wrapping up the taper a few months sooner prompted the dollar to unwind losses and triggered a fairly acute bout of curve flattening.

Two-year yields spiked 13bps from the day’s lows, while long-bond yields dropped to the lowest since January. The 2s10s tightened dramatically (figure above).

It’s time, Powell mused, to retire the word transitory. “Needless to say, the curve is flatter as a result,” BMO’s Ian Lyngen wrote. “We’ve long maintained that the Fed is the ultimate owner of the ‘transitory’ characterization and the Chair’s decision to move beyond that is a decidedly hawkish step,” he added.

At one point, the 5s30s touched 59bps, the flattest since March 2020 (figure below).

Powell stated the obvious: “Transitory” means not leaving a permanent mark on prices. Those of you inclined to Fed derision will laugh wryly. If “transitory” means anything, it means ephemeral.

Americans, Powell conceded, think “transitory” means “short-term.” Silly them. That wasn’t the Fed’s intended definition, the Chair said, adding that inflation should recede late next year. Many economists agree, Powell was keen to note.

Somehow, I doubt that’s much comfort. Core prices are rising at more than double the Fed’s target (figure below).

Money markets priced 59bps of Fed hikes by the end of next year, up 10bps from Monday.

Ultimately, Tuesday just underscored how maddening rates have been this year. Powell is caught between unpredictable virus mutations (which pose a risk to growth) and persistent inflation which, cruelly, is attributable to pandemic distortions and the policy decisions the Fed was forced to make at the onset of the worst public health crisis in a century.

It’s an unenviable position. For traders, yes. But for Powell too. Sometimes, one wonders if he really even wanted another term as Chair.

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9 thoughts on “Powell Gives Traders More Whiplash Amid Impossible Dilemma

  1. my two cents predictions have … 1) the Fed maintaining current taper pace with “Uncertainty” becoming the word of the month, and 2) Powell will retire if Trump returns to being president in 2025.

  2. I think the biggest thing we’ve learned from the transitory “debate” is that economic cycles are longer than news cycles. From an economics perspective 6-18 months is a normal temporary phase.

  3. It seems logical to conclude after Powell’s statements today that the Fed is more concerned (scared) about inflation now than with the virus or its potential further impact on growth. I am a little surprised because Powell has been so emphatic about being patient and measured regarding taper and lift off, is this the return of 2018 hawkish Powell? Clearly the markets have December of 2018 fresh in the memory bank, for the first time in months I honestly feel it could get ugly (market wise).

    1. Indeed. The markets do not like a hawkish Powell, and Dec. 2018 is an appropriate analogy. Powell can’t walk back this week’s testimony, and the next Fed meeting is week’s away. Buckle up, it could be a bumpy ride.

  4. I think Uncle Jerome had to sound hawkish going into Senate confirmation hearings because those pompous Senators will be posturing with indignant concern about inflation for the cameras to get a good sound byte for the 24/7 hysteria that is cable news.

    1. I tend to agree that Powell’s remarks were more performative than substantive. If he truly wants a fiscal response to address inequality issues, then presumably he supports Biden’s spending package and understands that GOP hysteria over inflation run amok is an initial obstruction that must be cleared, if not in deed, then at least in prepared remarks.

  5. Watching the spot VIX tomorrow. If it levels off below 25 then we probably just saw some profit taking, month end positioning, year end Mutual Fund redemptions driving the the price action. All of which are temporary and could conclude as soon as tomorrow. Real fear (whether of inflation, taper or variant) would keep the spot VIX above 25 for the rest of the week. Multiple days with spot VIX above 25 is destructive for equities and would likely be the beginning of a correction or more.

    Mr Market will tell us which is the true narrative soon.

  6. H-Man, after watching his testimony, it appears his opinion is inflation is here to stay for some time, and in order to address that issue, tapering will accelerate to clear the decks by March to lay the foundation for the hikes that will follow. The meeting in December should provide plenty of fireworks.

  7. The worry was always that the Fed would wait too long to begin both the taper and raising rates. The peak would be past by the time Fed hawks rousted Fed doves. Last time I looked, Iron ore is down 60% from its high, lumber is down 50%, steel is down 25%, base metals down 10-15% , soybeans are down 12%, corn don 20% and oil down 16%. Just saying.

NEWSROOM crewneck & prints