Investors reacted as if Fed Chair Jerome Powell’s Wednesday press conference was dovish, but many economists think it was on the hawkish side of the road.
Here are some key takeaways from Powell’s hour-long discussion with reporters on the state of the economy and central bank policy:
Read: The Fed is raising interest rates to combat the highest inflation in 41 years
You say dove and I say hawk
After Powell spoke, stock prices DJIA, +1.37% SPX, +2.62% rose sharply and bond yields TMUBMUSD02Y, 3.020% fell more at the short end than the long end, clear signs that the market was Powell for dovish held.
But Robert Perli, head of global policy at Piper Sandler, disagreed with that conclusion.
“The press conference was restrictive,” he said.
“All Powell could do at today’s press conference was talk about how inflation was too high, how determined the Fed is to bring it down and, by implication, how he would be willing to tolerate a recession if the need arose is to get the job done. ‘ Pearly said.
The market echoed Powell’s statement that a 0.75 percentage point slowdown in the pace of rate hikes will likely be appropriate “at some point”. Perli said this is “obvious” as the Fed cannot continue at this pace forever.
The market also liked when Powell said the Fed was entering a new “meeting-to-meeting” phase, perhaps believing a peak in interest rates was near.
Perli said that was a misinterpretation and Powell didn’t want to provide guidance because there was so much uncertainty.
Scott Anderson, chief economist at Bank of the West, said the lack of a Fed forecast could increase interest rate and stock market volatility around key US data releases, particularly on inflation, “as investors try to determine what that might mean the pace of additional rate hikes and the final peak in rates in the current tightening cycle.”
Powell “swams and weaves” over the recession
Powell has managed to evade the recession issues, said Josh Shapiro, MFR’s chief US economist.
Powell said the Fed is not attempting or expecting a recession and that we are not currently in one. He categorically refused to explain how that would affect the Fed’s policy stance should one materialize, Shapiro said.
The Fed chair said there was still a way to bring inflation down while maintaining a strong job market.
“We continue to believe there is a way [to a soft landing]. We know the path has clearly narrowed… and may continue to narrow,” he said.
Powell said the Fed is committed to cutting inflation and that likely means a period of “below trend economic growth and some moderation in labor market conditions.” “
What about September?
Powell left the door open for another “unusually large” hike of 0.75 percentage point in September, but said that would depend on the data.
Carl Tannenbaum, chief economist at Northern Trust, noted that Powell suggested the fed funds rate would be in the 3.25% to 3.5% range by the end of the year. That’s another 100 basis points higher, which the Fed might 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 zero. Powell “sounded slightly less hawkish to me,” he said.
balance sheet plans
Powell said the Fed’s balance sheet reduction program is working and markets “should be able to absorb that.” He said the plan is on track and could take two to two and a half years.
Some economists are beginning to forecast that the Fed will end its “quantitative tightening” program next year.