Jerome Powell this week re-learned a lesson taught time and again over the course of the Fed’s most aggressive tightening campaign in a generation: If you give markets an inch, they’ll take a mile.

Last month, a veritable procession of Fed officials used public speaking engagements and media cameos to suggest the sharp run up in long-end US Treasury yields since early August could stand in for the final rate hike tipped by the September dot plot.

This is a familiar tale by now. Most readers can recite it from memory. Higher long-end yields, and particularly higher real yields, serve to tighten financial conditions, and tighter financial conditions can do some of the Fed’s “dirty” work.

The problem with conveying that explicitly to markets is that in doing so, Fed officials risked triggering a bond rally, which is to say a reversal in the very dynamic they were presumably pleased to see.

Given that the proximate cause of equities’ recent consternation was the rekindled selloff at the long-end of the Treasury curve, a reversal of that selloff had the potential to ignite a stock rally. Lower bond yields and higher stock prices together constitute a powerful financial conditions easing impulse, thus wiping away the rationale for skipping the final hike.

The November FOMC statement enshrined last month’s Fed rhetoric into policy. In addition to tighter credit conditions, the statement said tighter financial conditions were expected to curb economic activity, hiring and, ultimately, inflation. That was a nod to the idea that another hike had become at least incrementally less likely since September due in no small part to higher bond yields.

Powell tried, during Wednesday’s post-FOMC press conference, to talk markets out of running with the message. He repeatedly emphasized that in order for market-based financial conditions to be relevant for monetary policy, any tightening impulse would have to be “persistent.” He said it over and over again.

While Powell insisted that the Fed is indeed still considering an additional hike, he also said the dot plot’s relevance tends to decay in the three months between one vintage and the next. Markets (quite rationally) took that as additional evidence to support the notion that rate hikes are likely finished.

And so, as these things go, 30-year bond yields tumbled some 30bps from Wednesday’s session highs to Thursday’s lows. Stocks were along for the rally.

The S&P notched its best FOMC rally (I measure using the day of the decision and the following session) since July of 2022.

If you’re old enough to remember July of 2022, you might recall that US equities were in the process of aggressively paring losses. At that month’s FOMC meeting, Powell came across as insufficiently strident, and the market seized on the opportunity to extend gains.

Just a month later, Powell was compelled to deliver a very terse (bordering on irritable) address at Jackson Hole, where he set about dismantling the rebound in stocks. He was successful. In fact, he helped engineer an acute tightening in financial conditions which buoyed the dollar, undercut equities and broke several foreign currencies, including the yen, the yuan and sterling. Stocks hit cycle lows a few weeks later.

Of course, the Fed’s in a much better place now in terms of inflation outcomes than they were last summer, so the risks aren’t as high. Nevertheless, Powell could’ve done without a rollicking stock rally and a precipitous decline in long-end yields this week.

Already, financial conditions were leaking back easier again, reversing some of the very tightening which played into the decision not to raise rates at this month’s meeting.

As Deutsche Bank’s Jim Reid put it, “With Powell seeing persistence of tighter financial conditions as ‘critical,’ we can’t help but wonder whether [the] dovish market reaction could incentivize some hawkish pushback, especially if it continued.”

Nomura’s Charlie McElligott warned on this weeks ago. On October 13, Charlie cautioned that the Fed risked getting caught in a familiar “dysfunctional feedback loop.”

“The Fed says ‘the market did the (tightening) job’ for them over multiple weeks, but then the market undoes that job in just a few days,'” McElligott said, describing what he called “the Fed’s extreme FCI reflexivity.”