Powell was far more dovish than I expected, particularly after his hawkish comments two weeks ago. He largely took the tail risk of a rate hike off the table. “I think it’s unlikely that the next policy move is a hike.”
The risk here is that he repeats the same mistake from the December pivot and the dovish message today offsets the intended restriction.
The first time odds of a cut exceed 50% is now September. There’s just a 40% chance of three cuts this year.
Rates down, stocks up. Classic relief rally.
Other takeaways
It will take longer to gain confidence that inflation is moving towards 2%. “My personal forecast is that we will begin to see further progress on inflation this year” and “as long as market rents stay low, shelter inflation will continue to ease.”
What could lead to rate cuts?
- Gain greater confidence of inflation to 2% (this is the premise we are already working under)
- Unexpected weakening of the labor market - “a couple tenths in the unemployment rate probably wouldn’t do that”
Is the current level of rates restrictive? “The evidence clearly shows policy is restrictive and weighing on demand.”
He was perhaps most forceful on the topic of the election and that it does not influence their decision. “We’re always going to do what we think is best for the economy. I can’t say it enough that we just don’t go down that road.”
Stagflation: "I was around for stagflation. It was brutal. Ten percent unemployment. High single-digit inflation. And very slow growth. Right now, we have 3% growth. Which is pretty solid growth, I would say, by any measure. And we have inflation running under 3%. So, I don't really understand where concerns about stagflation are coming from."
Divergent rate environments between the US and the globe, where most developed nations are expected to begin cutting soon. “We serve domestic mandates. Those countries just aren’t experiencing the kind of growth we’re having.”
Quantitative Tightening - Slowing the balance sheet runoff basically means the Treasury can issue $100B+ less in Treasurys in Q3, which should help alleviate some of the upward pressure on yields.
Last but not least…
This is the second meeting in a row where Powell spent a decent amount of energy on the potential for weakening in the labor market. Maybe that’s because hires and quits are back to pre-pandemic levels, while JOLTS is at a three year low.
Employment Expectations, basically job outlook, is the lowest since 2011 (thanks to SMBC for the graph).
