Investors reacted as if Fed Chairman Jerome Powell’s Wednesday press conference was dovish, but many economists believe it was on the hawkish side of the street.
Here are some of the key takeaways from Powell’s hour-long discussion with reporters about the state of the economy and central bank policy:
You say ‘dovish’ and I say ‘hawkish’
After Powell’s speech, stock prices
sharply increased and bond yields
fell more in the short term than the long term, clear signs that the market thought Powell was accommodating.
But Robert Perli, head of global policy at Piper Sandler, disagreed with that conclusion.
“The press conference was hawkish,” he said.
“All Powell could do at today’s press conference was talk about how inflation was too high, the Fed’s determination to bring it down and, implicitly, how he would be willing to tolerate a recession if that’s what’s needed to get the job done,” Perli said.
The market latched onto Powell’s statement that a slowdown from the pace of rate hikes by 0.75 percentage points will likely be appropriate “at some point.” Perli said it was “obvious” because the Fed cannot continue at this pace indefinitely.
The market also appreciated when Powell said the Fed was headed for a new “meeting-in-meeting” phase, perhaps thinking an interest rate peak was near.
Perli said it was a misreading and Powell didn’t want to give advice because there was so much uncertainty.
Scott Anderson, chief economist at Bank of the West, said the lack of forward guidance from the Fed could increase volatility in interest rates and stock markets around major U.S. data releases, particularly on the US. inflation” as investors grapple with what this might mean for the pace of further rate hikes and the terminal peak in rates in the current tightening cycle.
Powell “bobs and weaves” on the recession
Powell has managed to “move and weave” around recession issues, said Josh Shapiro, chief US economist at MFR.
Powell said the Fed was not trying to create a recession and did not expect it, and also that we are not currently in it. He declined to say outright how it would affect the Fed’s policy trajectory if it materialized, Shapiro said.
The Fed Chairman said there was still room to bring inflation down while maintaining a strong labor market.
“We keep thinking there’s a way [to a soft landing]. We know the path has clearly narrowed… and could narrow further,” he said.
Powell said the Fed is committed to bringing inflation down, which likely means a period of “below-trend economic growth and some easing in labor market conditions.” “
Powell left the door open for another “abnormally large” 0.75 percentage point rise in September, but said that would depend on the data.
Carl Tannenbaum, chief economist at Northern Trust, noted that Powell had suggested the year-end federal funds rate would be between 3.25% and 3.5%. That’s another 100 basis points more, which the Fed might prefer to accomplish with a 50 basis point hike followed by two 25 basis point hikes, rather than going from 75 basis points in September to 25, then to zero. Powell “seemed slightly less hawkish to me,” he said.
Balance sheet plans
Powell said the Fed’s program to shrink its balance sheet was working and 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 have begun to predict that the Fed will end the “quantitative tightening” program next year.