Investors reacted as though Fed Chairman Jerome Powell’s press conference on Wednesday was dovish, but many economists think it was on the hawkish side of the street.
Here are some of the key points from Powell’s hour-long discussion with reporters about the state of the economy and central bank policy:
Read: Fed raises rates to combat highest inflation in 41 years
You say “dovish” and I say “hawkish”
After Powell spoke, stock prices DJIA, +1.37% SPX, +2.62% rose sharply and bond yields TMUBMUSD02Y, 2.984% fell more at the short end than at the long end, signs clearly the market thought Powell was bad.
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, how the Fed is determined to cut it and, by implication, how he would be willing to tolerate a recession if that’s what it takes to get the job done.” Perli said.
The market latched onto Powell’s statement that slowing the pace of rate hikes to 0.75 percentage points is likely to be appropriate “at some point.” Perli said this is “obvious” as the Fed cannot continue at this rate forever.
The market also liked it when Powell said the Fed was moving into a new “meeting-to-meeting” phase, perhaps believing that the peak in interest rates is just around the corner.
Perli said that’s a misreading and Powell doesn’t want to give guidance because there’s so much uncertainty.
Scott Anderson, chief economist at Bank of the West, said the Fed’s lack of forward guidance could increase interest rate and stock market volatility around key U.S. data, particularly on the inflation “as investors try to determine what it could mean for that.” the pace of further rate hikes and the final peak in rates in the current tightening cycle.”
Powell makes “bobs and weaters” about the recession
Powell managed to “twist and weave” around the issues of the recession, said Josh Shapiro, chief US economist at MFR.
Powell said the Fed wasn’t trying to create a recession and didn’t expect one, and we’re not currently in one either. He declined to state categorically how it would affect the Fed’s policy path if it were to materialize, Shapiro said.
The Fed chairman said there was still a way to reduce inflation while maintaining a strong labor market.
“We continue to think that there is a way [to a soft landing]. We know that the path has clearly narrowed … and that it can be narrowed further,” he said.
Powell said the Fed is committed to reducing inflation, and that likely means a period of “below-trend economic growth and some softening of labor market conditions.” “
what about september
Powell kept the door open for another “unusually large” hike of 0.75 percentage points in September, but said it would depend on the data.
Carl Tannenbaum, chief economist at Northern Trust, noted that Powell suggested the year-end funding rate would be between 3.25% and 3.5%. That’s another 100 basis points, which the Fed might prefer to achieve with a 50 basis point increase followed by two 25 basis point hikes, rather than going from 75 basis points in September to 25 and then zero. Powell “sounded marginally less hawkish to me,” he said.
Balance sheets
Powell said the Fed’s balance sheet reduction program is working and markets “should be able to absorb it.” He said the plan is on track and could take two to two and a half years.
Some economists have begun to forecast that the Fed will end its “quantitative tightening” program next year.