Although you wouldn’t know it to look at financial conditions or, relatedly, stocks, bonds and the dollar, Jerome Powell came into this month’s FOMC decision riding a three-meeting streak of “wins,” where in this case “winning” means tempering investor enthusiasm.
Having apparently learned something from the July experience (when an insufficiently forceful message served to amplify a summer rebound in beaten down stocks), Powell averaged a 3% S&P decline on FOMC day plus the next session over the September, November and December meetings.
That’s a good thing in the current macro environment, defined as it is by elevated inflation. There was a time when Powell was lampooned for inadvertently triggering selloffs nearly every time he opened his mouth. But that was before the long dormant inflation genie woke up and wriggled out of the lantern. Now, he’s mercilessly derided when his remarks facilitate stock gains.
Although US equities’ Wednesday/Thursday rally wasn’t as spectacular as the surge Powell mistakenly triggered in July, if you include Tuesday’s ECI-driven gains, the three-day jump came to almost 4%. Some might suggest the market’s reaction to the ECI figures should’ve been a warning to Powell.
Of course, if we’re honest, there wasn’t much he could’ve done or said differently. Sure, he could’ve reiterated the warning from the December minutes about market rallies being conducive to unhelpful bouts of FCI easing, but is it realistic to suggest Powell should’ve answered in the affirmative on Wednesday when asked if the Fed would alter the rate path based on January’s stock and bond rally? I don’t think so. I don’t that’s realistic.
“There were basically only three things I could even spitball and conjure up which would have dictated a hawkish market response from Powell and each was, respectively, a ‘0-5’ Delta probability, so yet again, ‘de facto dovish’ was the only market response,” Nomura’s Charlie McElligott said, before listing the three things Powell might’ve said if he wanted to engineer a selloff. Charlie included subjective probabilities and a little humor:
- Talk up the terminal rate, which is impossible now because the recent disinflationary data is actually / finally being corroborated by wages and labor cooling (5d)
- Accelerated QT? LOLokay (0d)
- Issue some “shock” forward guidance stating that rates will be held at 5% through a period of time into the future, where he then loses his optionality in the case of a hard recession? (0d)
So, does the Fed need to be careful about the appearance of openly countenancing rallies when easier financial conditions have the potential to undercut the inflation fight? Well, sure. Obviously. But is it realistic to expect Powell to “manage down” stocks whenever they try to sustain a rally up to and until inflation gets all the way back to 2%? No, probably not. Does the impossibility of micromanaging equities raise the odds of stocks rallying far enough, fast enough to eventually force Powell to address animal spirits run amok? Yes. Unfortunately, yes.
The witty among you might ask, “Well, the Fed spent decades micromanaging stocks higher, so why can’t they spend the next 12 months micromanaging them lower in the service of beating back inflation?” If that’s your question, I regrettably have no answers. Well, I do. Just no good answers.
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