No Hawks Here

The Fed’s policy rate is “likely at or near its peak for this hiking cycle,” Jerome Powell acknowledged on Wednesday, in remarks to reporters following the release of a new dot plot which tipped a trio of rate cuts in 2024.

He was quick to add a caveat: The data has surprised the Fed before. The Committee is prepared to tighten further if appropriate.

Suffice to say not everyone was convinced. Not after the new dots and not after a subtle, but meaningful, tweak to the forward guidance.

In the minutes following the release of the December policy statement, I called attention to the addition of the word “any” to an otherwise unchanged sentence describing the Fed’s assessment process. The first question Powell fielded during the press conference was about that word.

“How should we interpret the addition of the word ‘any’?” a reporter from the AP wondered. Powell was candid. “We added [it] as an acknowledgement that we are likely at or near the peak rate for this cycle,” he said.

Steve Liesman asked about Chris Waller, and specifically about Waller’s November 28 remarks around the utility (and perhaps even the necessity) of rate cuts in 2024 to offset the read-through of falling inflation for the real policy rate. “Do you agree that the Fed wold become more restrictive as inflation fell?” Liesman asked.

Powell declined to comment on Waller specifically, but he addressed the question more broadly, recalling the Fed’s “three questions” approach to the hiking cycle. The first question was “How fast?” The answer was “very.” The second question was “How high?” Powell attempted to suggest the jury’s still out on whether terminal was definitively reached in July, but he acknowledged, again, that officials don’t expect additional increases. The final question is “How long?” or, as he phrased it Wednesday, “When will it be appropriate to dial back?” As it turns out, the Fed had a “preliminary” discussion around that this week. The “general expectation” is that the same discussion will feature prominently going forward.

Asked by WaPo‘s Rachel Siegel if he can “confidently say that the economy has avoided a recession,” Powell said “you can say there’s little basis for thinking the economy is in a recession now.” Of course, those are famous last words. Just to get on the record in case things go awry, Powell cautioned that “there’s always a probability [of] a recession in the next year.”

Still, he didn’t miss the opportunity to remind the world that he kept the faith all along. “I have always felt there was a possibility [of a soft landing] because of the unusual situation,” Powell told Siegel, adding that “so far” inflation appears to be moderating without significant damage to jobs or growth, but the final result “is far from guaranteed.”

Reuters asked if it’s a coincidence that the Fed’s outlook for rates and inflation seems to suggest the Committee does indeed intend to follow the so-called “Waller doctrine” in 2024. “Nothing that mechanical is happening,” Powell said. It’s hard to know what the real policy rate is at any given time, but that’s “certainly” something the Committee is considering.

One thing the Fed isn’t considering, according to Powell, is front-loading any policy action in 2024 to avoid the election. “We don’t think about elections or political events,” he said, in response to a follow-up question from Reuters. “We’ll do the things that we think are right for the economy when we think it’s the right time.”

When Nick Timiraos finally got a turn, The Wall Street Journal‘s “Fed whisperer” noted that recently, the market “is easing policy on [the Fed’s] behalf.” He mentioned market-implied pricing for 100bps of rate cuts in 2024. “Is this something you’re broadly comfortable with?” he asked.

Powell called the markets a “see-saw.” “We focus on what we have to do. People are going to have different forecasts and those are going to show up in market conditions [but] we have to do what we think is right,” he went on, before acknowledging that over the long run, “it’s important that financial conditions are aligned with what we’re trying to do.”

Asked by The New York Times‘s Jeanna Smialek if the Fed would be willing to cut rates even if growth stays firm as long as inflation continues to moderate, Powell responded with a boilerplate remark about the “totality of the data.” Unsatisfied, Smialek rephrased: “Is above-trend growth a problem?” “It’s not a problem,” Powell said. “It’s only a problem insofar as it prevents the Fed from achieving its goals.”

Two-year US yields fell nearly 30bps as Powell spoke. 10-year yields flirted with 4%, down a full percentage point from October’s intraday cycle highs. Swaps priced 145bps of cuts through the December 2024 meeting, 30bps more than the 115bps priced just before the new statement and SEP were released.