The Scientific Method
Jerome Powell almost threaded the needle on Wednesday.
Around 20 minutes into one of the most closely watched press conferences of Powell's tenure, major assets had round-tripped their knee-jerk reactions to the new FOMC statement, which included a nod to a possible reduction in the pace of rate hikes following this month's 75bps move, the fourth consecutive three-quarter point increment.
For the most part, Powell managed to come across as broadly neutral vis-à-vis the updated policy language
As you have pointed out many times over the years, Econimics is a soft science, but I am sure that there is a Phd formula that is 6 inches long that tries to determine when inflation becomes entrenched.
The stage is set up for re-testing recent lows this Friday on another hot jobs number, the Q&A had a “long way from neutral” feeling to it, might result in another December to remember.
Yeah, I think he got the idea he was coming across as overly dovish, when in fact the market was prepared to trade it pretty flat — right up until he started to get emphatic. I’m not sure the nod to terminal being higher than the September dot plot was that big a deal. Terminal pricing was already ~40bps above that anyway. But yeah, he turned what could’ve been flat everything and marginally lower stocks into sharply lower stocks, which is probably fine with the Fed, particularly in light of the recent rally. I think he did ok.
He’s reserving the “on autopilot” phrase for the meeting after the 50 bps hike.
if FED objective in short term is ‘restrictive’ (inflation is fueled in part by sentiment, no?) … way lower stocks is a desirable outcome, to reset sentiment. Maybe he did even better than ok … just not for the pivot hopefuls, e.g., recent equity buyers
Yeah for sure. All I’d say is that generally, what you want to do with these pressers is kinda shake out the knee-jerk reaction across assets, and make it into the close without anything getting too far afield, that way the market can sit with it for at least a few hours and then trade it “correctly,” as opposed to emotionally. The risk here, for example, is that Wednesday’s selloff turns into Thursday’s reversal, particularly if you get a bunch of downside monetization first thing in the morning and people start playing for upside via short-dated options. Then of course Friday is a wild card with NFP. I think what he’d rather see is a slow bleed in equities over several days that reverses this recent rally, while rates and the dollar tread water. What he’s got now is a pretty sizable selloff coming out of that presser, which means — you know — anything can happen, especially considering that the market already had the terminal rate at 5%. So, really, that’s not new and the step-down was confirmed. Traders could easily rationalize a risk-on rethink with that. The “rational” thing is stocks lower again Thursday, but these aren’t rational markets. The BoE is on deck too. That could go any number of ways.
Much appreciate this comment, H. Thanks for your perspective of the nuance and implications of the Fed’s actions.
I’m not keen on Powell’s style and messaging. My choice would have been Mary Daly when the Fed chair opened up.
In this current populist moment, it’s easy to bash CBers, and maybe especially Jerome Powell, head of the most important CB in the world. That said, I’d invite Mr. Powell into my foxhole any day of the week.
My takeaways
1. May or may not shift to smaller hikes in Dec (so 50 or 75 on table), then hikes (smaller) to continue in 2023 with no clear end date (very premature to think about pausing)
2. Terminal rate is moving up (I’d think should go at least 50 bp higher, now is only 100 bp above current FF)
3. Fed wants to force housing prices, stock prices, labor market all down
4. Fed confident it can fix things if over-tighten, less confident it can fix things if under-tighten
5. Fed sees no real progress made on inflation, labor market (not willing to forecast inflation slowing from falls in ISM, topping JOLTS, etc)
6. While some FOMC members may be worried about over-tightening (“cumulative” language), Powell is in the hawkish camp and so far retains control (unanimous decision)
What will happend if Powell was not allowed to know the market reaction while he was talking to the press?