Humble Stumbles

Jerome Powell on Wednesday emphasized that the Fed will be “humble” and “nimble” as it attempts to normalize monetary policy in 2022.

The Committee, he pledged, will respond to inflation as appropriate. He also emphasized “differences” between today’s economy and that which existed during the last tightening cycle.

No decisions have been made on the specifics of the balance sheet, he said. The runoff “principles” released on Wednesday are meant as a general framework.

Read more: Fed Nods To March Hike, Sketches QT With Runoff ‘Principles’

Powell refused to get ahead of the Committee when pressed by The Wall Street Journal‘s Nick Timiraos on operational details. “Those are all great questions [but] they’re questions we’re just getting to now,” he said, after Timiraos rattled off a series of prepared queries.

He alluded to “two to three meetings” which, when taken in conjunction with the language from the QT framework, suggests there’s no chance runoff begins in March. The Fed “can move sooner and faster but beyond that, it’s not appropriate for me to speculate further,” Powell mused. Pressed by CNBC’s Steve Liesman, Powell said simply, “I can’t help you.”

He was asked if rate hikes are possible at every meeting — whether all meetings are “live,” as it were. The same reporter mentioned “front-loaded” hikes. It’s “not possible,” Powell responded, to predict such things “with confidence.”

“We know that the economy is in a very different place than 2015,” he remarked, noting that inflation is obviously higher, and the labor market stronger. That will “have implications for the appropriate pace of policy normalization.”

Another reporter was more direct. “Would the Fed hike rates by 50bps?” Powell again juxtaposed 2022 with the last tightening cycle, before remembering it’s best to deflect. “We haven’t addressed those questions,” he said. No decisions on increments have been made.

US equities erased gains when Powell delivered the boilerplate (and totally appropriate) response to a question from Axios about the recent tightening in financial conditions associated with the rise in real rates and accompanying decline in stocks.

“The ultimate focus we have is on the real economy,” Powell said, suggesting the Fed hasn’t yet seen “changes that are persistent and material enough that they’re inconsistent with the achievement of our goals.” “We’re not looking at any one” metric, he said.

That was perfectly consistent with what a Fed Chair “should” say. As such, stocks’ attendant swoon could be written off.

But Powell stumbled when he was asked about the trade off between controlling inflation and jobs, and again when pressed on how the Fed plans to get from 7% CPI now to 2% by the end of the year.

A reporter from Politico wondered if the Fed can bring inflation under control without harming the labor market. Powell said both sides of the mandate currently call for the Fed “to move steadily away from highly accommodative policy.” He could’ve (and should’ve) left it at that. But he didn’t.

“I think there’s quite a bit of room to raise interest rates without hurting the labor market,” he ventured, in a superfluous remark reminiscent of October 2018’s ill-fated “long way from neutral” debacle. He recovered, adopting a more formal tone in noting that there’s a “strong sense that we can move rates up without severely undermining” the jobs market.

While attempting to map the road from the highest headline CPI in a generation back down to the Fed’s target, Powell slipped again. Since December, the inflation situation is “probably the same [or] slightly worse,” he stammered. He could’ve simply read from the script — something about a move away from monetary accommodation and an abatement of supply-side frictions. Everyone would’ve fallen asleep. Instead, he inexplicably decided to tell the market what he’d write down if January were an SEP meeting. Specifically, he said he’d raise his core PCE projections if he were submitting them today, and went so far as to quantify his theoretical submissions. That was totally unnecessary.

He tried to steer it back on track, but it was too late. “Our objective is to get inflation down to 2%,” he said, snapping out of it. “We’re gonna have to be adaptable and move as appropriate.”

On the March meeting, he said the “Committee is of a mind to raise the funds rate.” He also made a passing reference to risks “around the world” and to Omicron.

All in all, it wasn’t a good performance. To be clear (and I assume this obvious from the above), it’s not that Powell said anything “wrong.” Rather, he makes superfluous statements. We’ve seen this time and again over the last four years. He’s incapable of making it through a press conference without succumbing to the temptation to riff off-the-cuff, an inclination that rarely (if ever) serves him well. Wednesday was no exception.

It wasn’t a disaster, but it raised a familiar question: Given the frequency with which Fed officials indulge in public speaking engagements and television interviews (as many as a dozen in a week between them), what’s the purpose of a Powell press conference after non-SEP meetings when no major policy action was taken?

12 thoughts on “Humble Stumbles

  1. “I think there’s quite a bit of room to raise interest rates without hurting the labor market,”

    The Fed has repeatedly said supply chain issues are the main driver of inflation. Powell himself freely admits that higher interest rates will do little, on their own, to ease bottlenecks.

    So why raise interest rates?

    The benign answer is that he imagines that he can cool the rate of wage hikes without reducing the demand for labor very much.

    A less market-friendly read is that it is a warning that they are prepared to keep raising interest rates until he drives down the demand for labor, no matter what the cost to the overall economy.

    “We shall see” said the blind man to the deaf man.

  2. He flopped today at the worst possible time, we will test whether a 20% drawdown in equities gets the Fed’s attention, the press conference only did damage today, which is telling because as you point out, Powell did not say anything outlandish or that the markets did not already know.

  3. That was quite a move by the front end of the curve. Seems like risk assets are resetting valuations based on using the front end for the risk free rate. If this holds as the method du jour, it will have a massive impact on volatility and risk premiums going forward. Or maybe it already has been this way for awhile and I’m just waking up to it.

  4. Powell has many positive attributes as a Fed chair. Public speaking / communications is definitely not one of them. A decent press conference should not have moved the financial markets as much as it did. He flopped, sorry to say.

    1. How is having an hour-long press conference consistent with letting markets price in whatever they want? If Powell wanted markets to price in whatever they wanted, he’d release the new statement, turn off his monitors and go home for the day.

      1. The conference questions gave him multiple opportunities to signal dovishness. He didn’t take them. Nearly everything is still on the table. All meetings are live. As such the market can react how it will and the fed has the option to pivot dovish, or not, at its discretion.

        1. That doesn’t answer my question. If you want markets to trade the policy statement and QT framework as they see fit, free from any “noise” and not hampered by the necessity of interpreting one man’s cadence, why not release the statement and the runoff principles and leave it at that?

          Rates (and equities) didn’t trade “tightening” on Wednesday. They traded Powell.

  5. I thought his message was pretty clear.

    Fed is going to raise rates and shrink balance sheet, may act more assertively than 2015, labor market and economy are strong enough to take it (they think), rate hikes will start soon, shrinking will start after the first rate hike but probably need a couple more meetings to work out details (or, reading between the lines, to get past Omicron). He also sent the message that neither a flattening yield curve nor market declines, at least of the sort that is happening currently, will dictate their actions.

    This message only moved the markets because some on the Street had recently started pitching the idea that the Fed was ready to ease off. That was contra to the Fed’s communications, and wrong, but that’s their problem, not Powell’s. I don’t think Fed chairs can be asked to not correct the market’s misconceptions lest they affect prices. Affecting prices should seldom be on their list of priorities, in my opinion.

  6. Anyway, that’s done, now to figure out how to play from here. AAPL report looked like a make-or-break event this week, but now I wonder. Fed just poured cold water on the “Fed put here” hopes, would upside from AAPL (if it happens) going to lift whole market or merely AAPL + its ecosystem.

    Seems to me that a lot of people will be working overtime on
    1. Making a shortlist of “tech wunderkinds” to pick up when they are bargains and deciding what prices would make them bargains. Just because a wunderkind used to be 25X revenue and infinity times earnings, and now its 15X revenues and infinity times earnings, doesn’t necessarily make it a bargain – but 10X might…
    2. Making a shortlist of names to own for a “growing economy plus rising rates” environment. Lot of cyclical names to look through, but supply chain + inflation makes the filtering a lot harder – plenty of names that aren’t expensive and should see nice demand growth but also shrinking margins.
    3. Making a shortlist of names to own for a “stalling economy plus rising rates” environment. I fear that’s going to be a short list indeed. A lot of the traditional defensives are also bond proxies.
    4. Resisting the temptation to go blow all the hoarded portfolio cash on any of those lists right away. Cash is the opposite of trash right now; cash is optionality.

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