Investors reacted as if Federal Reserve Chairman Jerome Powell’s press conference on Wednesday was peaceful, but many economists believe it was on the hawkish side of the street.
Here are some key points from Powell’s hour-long discussion with reporters on the state of the economy and central bank policy:
Read: Federal Reserve raises interest rates to tackle highest inflation in 41 years
You say “doves” and I say “hardcore”
After Powell’s speech, DJIA stock quotes,
Sharp increase and bond yields TMUBMUSD02Y,
It’s down more in the short term than in the long term, which are clear signs that the market thinks Powell has been adjusting.
But Robert Burley, Piper Sandler’s head of global politics, disagreed with that conclusion.
“The press conference was tough,” he said.
“All Powell can do at today’s press conference is talk about rising inflation, the Fed’s determination to cut it, and, implicitly, how he would be willing to take on a recession if that’s what’s needed to get the job done,” he said.
The market stuck to Powell’s statement that a slowdown in rate hikes of 0.75 percentage point would likely be appropriate “at some point”. Burley said that was “obvious” because the Fed cannot continue at this pace indefinitely.
The market value also soared when Powell said the Fed was heading into a new “meet in a meeting” phase, he may have thought peak interest rates were near.
Burley said it was a misreading and that Powell didn’t want to give advice because there was too much uncertainty.
Scott Anderson, chief economist at Bank of the West, said the lack of advance guidance from the Federal Reserve could increase volatility in interest rates and stock markets around key US data releases, particularly on US inflation, as investors grapple with what this could mean. The pace of additional price hikes and the eventual peak in rates in the current tightening cycle.
Powell “swaying and weaving” on slack
Josh Shapiro, chief US economist at MFR, said Powell was able to “move and weave” around recession issues.
Powell said the Fed wasn’t trying and wasn’t expecting a recession, and also that we’re not in it right now. Shapiro said he declined to say explicitly how this would affect the Fed’s policy trajectory if it materialized.
The Fed chair said there was still room to bring down inflation while maintaining a strong labor market.
“We keep thinking that there is a way [to a soft landing]. We know that the road has clearly narrowed… and it could narrow even more,” he said.
Powell said the Fed is determined to bring down inflation, which likely means a period of “beyond trend economic growth and some easing in labor market conditions.” “
Powell left the door open for another “unusually large” 0.75 percentage point rise in September, but said that would depend on the data.
Karl Tannenbaum, chief economist at Northern Trust, noted that Powell suggested that the federal funds rate at the end of the year would be between 3.25% and 3.5%. That’s another 100 basis points, which the Fed would prefer to achieve with a 50 basis point hike followed by two 25 basis point hikes, rather than going from 75 basis points in September to 25, and then back to zero. Powell, he said, “sounded a little bit less tough on me.”
balance sheet plans
Powell said the Fed’s program to shrink its balance sheet has been successful and that markets “should be able to absorb that”. He said the plan was on track and could take two to two and a half years.
Some economists are beginning to predict that the Fed will end its “quantitative tightening” program next year.