Was Fed Chairman Powell a pacifist or not? 4 key tips from Wednesday’s press conference

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 combat highest inflation in 41 years

You say “doves” and I say “hardcore”

After Powell spoke, DJIA stock quotes,
+ 1.37%

SPX,
+ 2.62%
TMUBMUSD02Y bond yields rose sharply,
3.016%
It fell more on the short end than on the long end, which are clear signs that the market thought Powell was dovish.

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 how inflation has been so high, how the Fed is so determined to bring it down, and tacitly how it would be willing to take on a recession if that was what was needed to get the job done,” Burley said.

The market stuck to Powell’s statement that a slowdown in rate hikes of 0.75 percentage point is likely to be appropriate “at some point”. Burley said this is “obvious” because the Fed cannot continue at this pace forever.

The market was also impressed when Powell said that the Fed was moving into a new “meet to meeting” phase, perhaps thinking peak interest rates were near.

Burley said that’s a misreading and Powell doesn’t want to give guidance because there’s a lot of uncertainty.

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Scott Anderson, chief economist at Bank of the West, said the lack of advance guidance from the Fed could increase interest rate and stock market volatility around important US data releases, particularly on inflation “as investors try to determine what that might mean.” The pace of further price increases and the eventual peak of rates in the current tightening cycle.”

Powell “swaying and weaving” on slack

Josh Shapiro, MFR’s chief US economist, said Powell has been able to “sway” around recession issues.

Powell said the Fed wasn’t trying to trigger a recession and didn’t expect it to happen, and we’re not in a recession right now. Shapiro said he declined to categorically say how that would affect the Fed’s policy trajectory if it came to pass.

The Fed chair said there is still a way to bring down inflation while maintaining a strong labor market.

We still believe there is a path [to a soft landing]. We know that the road has clearly narrowed… and it has narrowed even more,” he said.

Powell said the Fed is determined to bring down inflation, and that likely means a period of “less-than-trend economic growth and some decline in labor market conditions.”

How about September?

Powell kept the door open for another “unusually large” rise of 0.75 percentage point in September, but said it 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 in the range of 3.25%-3.5%. This is another 100 basis points higher, which the Fed would prefer to achieve with a 50 basis point increase followed by two 25 basis point increases, rather than going from 75 basis points in September to 25 and then to zero. “Powell seemed marginally less hawkish to me,” he said.

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balance sheet plans

Powell said the Fed’s program to shrink its balance sheet 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 predict that the Fed will end its “quantitative tightening” program next year.

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