Technically You Did Start It, John

“My fault? How is it my fault?” “Well, you did start it, John.”

In “Critics Decry Fed’s Dovish Pivot. Does Powell Deserve The Derision?” I mentioned John Williams.

Specifically, I recalled Williams’s remarks to The New York Times‘s Jeanna Smialek. In an August interview, Williams told Smialek that, “Assuming inflation continues to come down… if we don’t cut interest rates at some point next year then real interest rates will go up and up and up, and that won’t be consistent with our goals.”

That should’ve been a hint to markets. Once terminal was reached, the Fed intended to pivot to a real policy rate focus. The implication: Nominal rates would need to be cut as inflation receded in order to prevent the real rate from rising mechanically.

That simple notion was lost on many outside the macro rates space (as one popular derivatives strategist was keen to note late last month), but Chris Waller brought it to the fore on November 28, when he effectively pre-announced the Fed’s dovish pivot at the December FOMC.

Now, the Fed’s under fire from critics who decried the new dot plot and, more angrily, Jerome Powell’s failure to play bad cop to the market’s “worst” rally impulses during the press conference. At one juncture on Thursday, markets were priced for ~160bps of Fed cuts in 2024, and conviction around a March cut was high.

One way to slam the brakes on all of this would be to trot out Waller for a mea culpa. Failing that, Williams will do. “We aren’t really talking about rate cuts right now,” he told CNBC on Friday. “We’re very focused on the question in front of us, which as chair Powell said, is ‘Have we gotten monetary policy to sufficiently restrictive stance in order to ensure the inflation comes back down to 2%?’ That’s the question in front of us.”

It’s true, Powell did say that. But he also said the Fed had a “preliminary” discussion about the timing of rate cuts at this week’s meeting. CNBC knows all about that. Powell’s interlocutor for that exchange was Steve Liesman.

Asked Friday about the prospects for a March rate cut, Williams said “it’s just premature to be even thinking about that.” He went on to pretend the Fed’s got its finger on the trigger for another hike should that be necessary. “We need to be ready to move to tighten further if [inflation] progress were to stall or reverse,” he mused.

I assume this goes without saying, but Williams’s sole purpose for Friday’s business television cameo was to manage market expectations, which pretty clearly got away from the Fed this week.

That’s not to suggest the Fed absolutely wouldn’t raise rates again under any circumstances. It’s just to say that no one “got it wrong” when it comes to interpreting the Fed’s likely next move. Maybe the market overshot (give the market an inch and it’ll take a mile every time, after all), but it’d take a pretty severe turn for the worse on the inflation front to move the Committee back into hiking mode (as opposed to, say, just delaying cuts).

For what it’s worth, Oksana Aronov doesn’t necessarily agree. “I know this is a crazy notion right now but we think that on balance, there is more of a risk of a hike next year than these aggressive cuts that people are pricing in,” she told Bloomberg earlier this week.