Powell Didn’t Try To Kill The Rally. And That’s Notable

There wasn’t much America’s beleaguered technocrat in chief could’ve said differently this week to short circuit the rebound on Wall Street. And maybe he wasn’t trying.

I should probably rephrase: There wasn’t much Jerome Powell could’ve said differently without changing the narrative as expounded by the November FOMC statement, his own remarks at last month’s post-FOMC meeting press conference, subsequent remarks from his colleagues and minutes from last month’s policy gathering.

A “step down” to 50bps hike increments is likely this month, but rates will need to go higher than previously thought, and the Committee intends to cling to terminal for as long as necessary once peak Fed funds is achieved. That’s the narrative. It was well socialized prior to Powell’s speech on Wednesday.

Read more: Powell Delivers 2,400-Word FOMC Statement

To be sure, a dovish interpretation of his Brookings address was possible. Most obviously, he confirmed that the pace of rate hikes will almost surely decelerate this month. He also used the adjective “somewhat” in describing how much higher peak Fed funds is likely to be than the 4.6% tipped by the September projections.

Moreover, Powell said the Fed doesn’t want to crash the US economy, doesn’t want to overtighten and will stop shrinking the balance sheet at a “safe” place. More broadly, he didn’t adopt Jim Bullard’s “bad cop” act, which is about the only thing that would’ve compelled markets to trade his Wednesday speech hawkishly.

So, Powell got what he “deserved” for not insisting on the kind of terse, somber cadence he employed in Jackson Hole. And maybe he didn’t mind so much. Whatever the case, both stocks and bonds rallied, and the dollar retreated.

The result: One of the largest FCI easing impulses of 2022 (figure below). Ostensibly, that’s counterproductive, in that a reinvigorated wealth effect is conducive to inflation.

Wednesday marked the second outsized easing blast this month, and came just two weeks after the release of October’s cooler-than-expected CPI report catalyzed one of the largest FCI easing impulses on record.

Again: There wasn’t much Powell could’ve done differently without chiding the market and delivering a Jackson Hole sequel. More importantly, maybe Powell is no longer as vexed as he once was about the prospect of rallies working at cross purposes with the Fed’s inflation-fighting efforts.

You’ll recall that Powell’s Jackson Hole scolding came on the heels of a large cumulative FCI easing impulse seen in the aftermath of the July FOMC meeting, with a kicker from a “false dawn” CPI report. The annotated figure (below) shows that episode, the subsequent sharp tightening and the easing seen over the past several weeks.

Wednesday’s speech was an opportunity for Powell to lean against equities, hint at the possibility that terminal could be materially higher than 5% and bolster the dollar. He didn’t do any of that. And that might’ve been a conscious decision.

“Powell clearly was not there to punish markets for the monster easing seen in financial conditions experienced over the past month and a half with a doom and gloom hawkish message, which had been [the] expectation for many,” Nomura’s Charlie McElligott said Thursday.

“He did no such thing this time around,” Charlie added. “It seemed clear to me that Powell signed off on the next and final ‘phase shift’ in the Fed’s tightening cycle: His messaging felt like he was throwing the market a bone by cutting the left tail scenario on over-tightening risk… instead just focusing on the length of time left where the Fed continues to hold rates in restrictive territory.”

Not exactly “good cop.” But at this point, not “bad cop” is more than good enough for markets.