Fed Chair Powell is having a communication problem with the market

No matter what Federal Reserve Chairman Jerome Powell tells market participants these days, it seems they only hear the good stuff. Two recent examples: First in July, when Powell hinted that smaller interest rate hikes could be on the way. The second was last week, when the central bank leader seemed to confirm that the end of the consecutive 0.75 percentage point increases actually was at hand. In both cases, the Fed has been forced to push back on the market’s dovishness, following violent rallies seemingly fueled by an assumption that Powell had signaled easier monetary policy ahead, even though the chair had also talked extensively about the Fed’s commitment to fighting inflation. So, is it a question of the market — apologies to Simon and Garfunkel’s ‘s “The Boxer” — just hearing what it wants to hear and disregarding the rest, or is Powell just bad at this? “There’s a little bit of both,” said Art Hogan, chief market strategist at B. Riley Financial. “It’s not for lack of trying. Chair Powell is really trying to message the fact that the fed funds rate has to be restrictive to tamp down inflation. The problem with that is it’s a moving target.” The more recent example of the Powell/market miscommunication rift came after a Nov. 30 speech at the Brookings Institution in Washington, D.C. In those remarks, the chair said a reduction to a 0.5 percentage point increase could “come as soon as the December meeting.” However, he was even more clear that “restoring price stability” i.e. bringing down inflation “will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.” Markets, though, chose to focus far more on the first part of those remarks, sending stocks sharply higher and propelling the Dow Jones Industrial Average up more than 700 points that day. Another day, another message By Monday, though, the story had changed. An article in The Wall Street Journal heading into the Fed’s “quiet period” ahead of the Dec. 13-14 meeting reiterated the idea that while a step down to a 50 basis point hike indeed was ahead, so was the likelihood that the Fed was in a higher-for-longer mode on rates. That sent stocks into a tailspin that wiped out a good chunk of Wednesday’s gain. Markets added to those losses in another selloff Tuesday. If the story sounded familiar, it’s because a similar scenario played out over the summer. At his news conference following the July meeting , markets latched onto a Powell comment that “it likely will become appropriate to slow the pace of increases” after the Fed deems policy restrictive. Investors, though, saw no qualifiers in the statement and embarked on a weekslong rally in an attempt to dig out of the 2022 bear market. A month and a half later, Powell delivered an uncharacteristically terse speech at the Fed’s annual Jackson Hole, Wyoming summit. The brief comments noted the Fed would keep rates higher “for some time,” promised that policymakers would “use our tools forcefully” to tackle inflation” and cautioned that tight monetary policy likely would result in “some pain” for the economy. Despite the red flag at Jackson Hole and plenty of caveats in his speech last week, markets still are struggling to get the Fed’s message. “I wouldn’t lay it at Jay Powell’s feet and say ‘your messaging has been terrible,'” Hogan said, using the chair’s commonly known nickname. “He’s been pretty stern. Jackson Hole couldn’t have been a better example of that: a very short and very hawkish talk that was a slap on the wrist for the market to hear.” One more chance So Powell heads into next week’s Federal Open Market Committee meeting with another opportunity to set the market straight. The meeting is likely to include that half-point rate hike that the market has been awaiting, but also should see some more clarity from Powell that the inflation fight is far from over and anyone looking for lower rates soon could be disappointed. While traders are pricing in a 5% fed funds rate by next summer, they also are anticipating the FOMC to reverse quickly and cut half a percentage point by the end of the year. Krishna Guha, head of global policy and central bank strategy at Evercore ISI, wrote that the experiences of the past several months show that “managing financial conditions is not easy, [and] Powell may not be particularly good at it as he seems to find it difficult to maintain a consistent tone from one set of remarks to the next.” “We should expect a more austere tone (and a peak rate possibly at 5 to 5.25) in December,” Guha added. The Journal’s article put particular emphasis on the likelihood that Powell will stress that rates are unlikely to come down anytime soon. Central bank officials have stated repeatedly that they are largely unimpressed with the latest data showing inflation slowing a bit, and Friday’s nonfarm payrolls report in fact showed that wage pressures remain prevalent amid a tight labor market. Markets, though, have shown an overt willingness to accentuate the positive from the Fed, so Powell’s job, again, will be to manage expectations. “Because he has a record of veering into competing monetary lanes, at least in the way the market interprets his comments, it isn’t guaranteed that he delivers what the market wants next week. This is not to suggest that he’s going to go back into the fast monetary lane, rather he could amend even slightly, his remarks from last week,” wrote Quincy Krosby, chief global strategist at LPL Financial. “When all is said and done, however, the market may well have to wait for the December 13-14 meeting and the press conference that follows, to see which monetary lane the Fed’s chairman is actually in,” she added.

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