FOMC meeting recap: Powell not hawkish enough, traders price in 50bps of cuts by EOY

Today’s Fed meeting was always going to be more about what Jerome Powell and Company were saying rather than about what they were doing…

FOMC monetary policy decision and statement

…After all, the market had fully priced in a 25bps interest rate hike to the 4.50-4.75% range, and that’s exactly what Jerome Powell and company delivered.

Quickly turning our attention to the statement though, there was an unexpected inclusion: The central bank left in a key statement that “ongoing increases” in interest rates will be appropriate, suggesting that multiple interest rate hikes (March and May) are likely, whereas many traders had assumed the central bank would pause increases after the next Fed meeting in March. As Bloomberg Fed reporter Steve Matthews noted, “you can’t have one ‘increases.’”

Separately, the statement also noted that inflation has “eased somewhat” but still remains elevated, reflecting the committee’s view that there is still more work to be done to ensure price pressures have fully faded. In a final, minor tweak, the statement also acknowledged that the war in Ukraine is contributing “elevated global uncertainty,” rather than “upward pressure on inflation and weighing on economic activity.”

FOMC Chairman Powell’s press conference

Lately, Fed Chairman Powell’s press conferences have earned a reputation for “softening,” if not outright reversing, the initial market movements in reaction to the monetary policy statement.

As we go to press, Powell appears to be following that playbook, with a mix of hawkish and dovish comments [emphasis mine]:

• THE FED IS DEAD SET ON REACHING ITS 2% INFLATION TARGET.
• WE WILL ALMOST CERTAINLY HAVE TO MAINTAIN OUR RESTRICTIVE STANCE FOR SOME TIME.
• FULL EFFECTS OF RAPID TIGHTENING YET TO BE FELT.
• THE LAGS FED INTO OUR DECISION TO RAISE RATES BY 25 BPS TODAY.
• A SLOWER PACE ALLOWS US TO BETTER EVALUATE OUR PROGRESS TOWARD OUR OBJECTIVES.
• LAST YEAR, THE ECONOMY SLOWED SIGNIFICANTLY.
• CONSUMER SPENDING APPEARS TO BE EXPANDING AT A SUBDUED PACE.
• WAGE GROWTH IS ELEVATED, AND THE JOB MARKET IS EXTREMELY TIGHT.
• THE LABOR MARKET CONTINUES TO BE OUT OF BALANCE.
• INFLATION REMAINS WELL ABOVE GOAL.
• INFLATION HAS SLOWED IN THE LAST THREE MONTHS, WHICH IS A WELCOME CHANGE.
• LONG-TERM INFLATION EXPECTATIONS REMAIN STABLE.
• WE WILL REQUIRE SIGNIFICANTLY MORE EVIDENCE TO BE CONFIDENT THAT INFLATION IS ON A DOWNWARD TREND.
• IT IS IMPORTANT THAT FINANCIAL CONDITIONS CONTINUE TO REFLECT THE POLICY RESTRAINTS WE HAVE IMPOSED.
• WE HAVE YET TO SEE DISINFLATION IN CORE SERVICES OTHER THAN HOUSING.
• THE TERMINAL RATE COULD CERTAINLY BE HIGHER THAN WE ANTICIPATED IN DECEMBER.
• WE DON'T WANT TO OVERTIGHTEN, BUT WE HAVE TOOLS TO HELP US IF WE DO.
• FOR THE FIRST TIME, WE CAN DECLARE THAT A DEFLATIONARY PROCESS HAS BEGUN.
• WE’RE TALKING ABOUT A COUPLE MORE RATE HIKES TO ACHIEVE AN APPROPRIATELY RESTRICTIVE STANCE.
• TAKING PAUSES BETWEEN MOVES IS NOT SOMETHING THE COMMITTEE IS DISCUSSING.

In summary, Powell confirmed his expectation that the central bank will raise interest rates (at least) two more times, but his acknowledgement that “the disinflationary process has begun” has given traders more confidence that those will be the last two hikes of this cycle and that the Fed will be on hold midway through Q2. Meanwhile, his repeated focus on “core services ex-housing” provides a clear inflation metric for traders to watch to evaluate whether what the central bank will do in the coming months.

Market reaction

After a modest “risk off” reaction (indices down, dollar up) to the central bank’s monetary policy statement, the market has seemingly decided that Powell’s press conference was more dovish than anticipated.

The US dollar is falling by a 50-100 pips against all of its major rivals. The entire Treasury yield curve is falling, with the closely-watched 2-year yield falling by more than 10bps to 4.12% as we go to press; indeed Fed Funds futures traders are pricing in a full 50bps of interest rate cuts by the end of the year! Gold is rallying 12 points on the day to $1958 and the broad US indices are in rally mode, highlighted by a 1.5% gain in the Nasdaq 100.