Fed watchers say markets got it all wrong on Powell ‘pivot’

Some Fed watchers say markets read Powell’s press conference too narrowly.
Jerome Powell, chairman of the US Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C. Image: Bloomberg

Federal Reserve Chair Jerome Powell is raising interest rates at the steepest pace in a generation and he said Wednesday that another big increase is possible. Yet investors sent stocks surging on his comments that the hikes will eventually slow.

Some Fed watchers say markets read Powell’s press conference too narrowly.

Economists pointed out that the Fed’s top focus remains curbing inflation, even if it comes at a cost to employment, the other side of the central bank’s congressional mandate. In addition, Powell cited forecasts in mid-June that showed officials expected to raise rates to about 3.4% this year and 3.8% in 2023 — projections that are above market expectations.

That so-called dot plot, which the Fed will next update in September, were the best current guide of were the Fed was heading this year and into 2023, Powell said.

“The markets shot first and asked questions later,” said Neil Dutta, head of US economic research at Renaissance Macro Research LLC. “I don’t think inflation is going to be cooperating in a way that makes cuts plausible. Powell said repeatedly the economy needs to slow down to meet their goals. A modest recession probably won’t do the job. They are going to have to do more.”

Piper Sandler’s Roberto Perli and Benson Durham, noted that the jump in stocks, and larger decline in short-term yields than long-term rates is the “classical market reaction one would expect if the odds of rate cuts had increased or their timing had been brought forward.”

But Powell’s comments were “not the words of a Fed chair who is pivoting towards a dovish stance,” wrote ex-Fed official Perli, the firm’s head of public policy, and Durham, head of global asset allocation.

“The markets clearly think the net of today is that the Fed will end up doing less tightening, but it was hard to come away from the Fed press conference thinking the Fed delivered a dovish pivot,” analysts at NatWest Markets said in a note. “If anything, based on what we heard today, the median Fed member’s view on the path of the Fed funds rate over the remainder of this year could conceivably be higher.”

© 2022 Bloomberg

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Many investors will loose big time buying the intermittent dips on the plummet over the cliff.

I hear you, but there is a seller for every buyer. The market consists of many individuals who have opposing opinions about the same instruments at any given moment.

I depend on pessimists like yourself for the opportunity to act on my momentary optimism.

We cannot predict the markets, but we can expect the Fed to devalue the dollar to compensate for more significant declines in the share indices. It is impossible for the market indices to crash in terms of the currency when the Fed is hell-bent on winning the race to the bottom. Read that sentence again.

We have already gone over the cliff in 1971 with the Nixon Shock. The gold standard marked the cliff. Since then, at times, the markets have been in freefall relative to currencies that are also in freefall against gold, the stable yardstick. I am mesmerized by the fact that Berkshire Hathaway hasn’t delivered any gains, measured in terms of ounces of gold, over the past 24 years, while it delivered an almost 600% return in terms of the dollar over that period. What do we deduce from this fact? – The fed uses its powers to turn a donkey into a racehorse to enable the government to tax the winnings.

It is all relative, but during these unpredictable times of volatility and uncertainty, one can make a handsome profit if your system keeps the risks low, while it puts the odds on your side. We can say the same about farming.

After all is said and done, the only difference between farmers and investors is in the clothes they wear.

Sensei, I enjoy your market prose.

Market watchers say the Fed got it wrong.

There’s a fool for every market dip.

End of comments.

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