I doubt there was much to distill from Thursday’s price action in US markets other than that Nvidia alone can’t shoulder all of the burden, all of the time.

Aside from what one imagines were meaningful intraday flow dynamics (e.g., vol control selling), equities probably succumbed to something akin to a “sell the fact” trade, as I suggested they might following another astounding beat and raise from Nvidia.

I don’t know if it’s all in the price, so to speak, but a lot of it is. You can take “it” to mean anything you want: A.I.’s potential, higher odds of a soft landing, lower odds of a recession, the end of the Fed’s hiking cycle and so on.

Obviously, traders were keen to hear from Jerome Powell on Friday. The r-star debate received top billing ahead of time. “Bond Traders Are Obsessing Over R-Star Gauge,” Bloomberg declared. Now you see why I started “obsessing” over this discussion months (and months and months) ago. Given the distinct possibility that the world changed in the 2020s, this was guaranteed to become the macro topic du jour.

As discussed in these pages on too many occasions to count, the implication of a higher neutral rate is that policy isn’t as restrictive currently as you’d be inclined to believe. That would explain a lot, including the US economy’s resilience in the face of what, ostensibly anyway, are very restrictive policy settings. The Atlanta Fed’s GDPNow tracker was up to 5.9% on Thursday.

Of course, the odds of Jerome Powell definitively tipping a higher long run dot in September’s SEP were very low and the odds of Powell nodding in the direction of a higher inflation target were even lower, where that means nil. “I attribute no delta to whispers that the Fed could be discussing the potential of raising the inflation target,” Nomura’s Charlie McElligott said. “[That would] risk unanchoring long-term rates and inflation expectations on top of the credibility discussion of ‘moving the goalposts.'”

To be sure, the neutral rate ship has sailed, at least in terms of the debate. There’s no not addressing it, and I’d suggest the long run dot is destined to move up eventually, maybe even over the next few SEPs. But that’s not the same thing as a grand pronouncement from Powell, who’s anyway skeptical of policymakers’ capacity to accurately estimate neutral.

It’s certainly true that an upward shift in the long run dot would be a meaningful event with market-moving potential, so maybe the Fed sees some utility in telegraphing a prospective shift ahead of time. But as JPMorgan’s Jay Barry remarked, the fact that Powell has “repeatedly” described current policy settings as “restrictive” makes it less likely that he’d chance a dramatic declaration. If Powell were to suggest that r-star is meaningfully higher, then suddenly markets would need to price in a Committee which no longer believes current policy is significantly (let alone “sufficiently”) restrictive.  

Arguing against that were remarks on Thursday from Patrick Harker, who told CNBC the Fed has “probably done enough” and should stay on hold pending more data. “We are in a restrictive stance,” he said. Susan Collins was marginally more hawkish. “We may need additional increments,” she told Yahoo. But she was quick to note that the Fed may well be “very near a place where we can hold for a substantial amount of time.”

Both officials were emphatic about the “higher for longer” message, but the underlying assumption is that we’re one hike away from terminal funds — at most. A declaration from Powell that neutral is materially higher would render Harker’s comments almost nonsensical. Collins’s remarks wouldn’t look much better.

I assume I’ve been clear, but just in case: The point isn’t that Powell shouldn’t or won’t allude to a higher long run (or short run!) neutral rate. He should and very well might. The point, rather, is that there was virtually no chance he’d make an “aggressive statement” in that regard, as JPMorgan’s Barry put it. If he did, terminal rate pricing would move higher immediately. Short-end yields would rise sharply. And the curve would presumably bear flatten, although the impact at the long-end would be a tug of war between hard landing bets based on a potential over-tightening (bond bullish) and a continuation of this month’s repricing (bond bearish).

In short, it’d be chaotic, stocks would probably cringe and the financial media would dig up every instance of Powell alluding to policy being close to sufficiently restrictive and juxtapose them with the terminal rate read-through of a markedly higher r-star.

I assume Powell doesn’t want that. Any of it. Particularly not when things are going so well. But, as noted above, he can’t skirt the issue. That means market participants should probably prepare for a “something for everyone” speech, designed specifically not to rock any boats.

Commenting late Thursday on a lackluster session for US equities, Nomura’s McElligott said there’s “a bit of de-risking going through the market into the Jackson Hole event-risk, in case there is any sort of hawkish surprise as it relates to r-star and the long-term dot.” His take: “Yawn, I just don’t see that occurring.”