No matter what Federal Reserve Chairman Jerome Powell says to 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 might be on the way. The second was last week, when the central bank leader appeared to confirm that the end of back-to-back 0.75 percentage point hikes was in fact near. In both cases, the Fed was forced to push back on market dovishness, following violent rallies seemingly fueled by the assumption that Powell had signaled easier monetary policy ahead, even though the president had also talked at length about the Fed’s commitment to fighting inflation. So is it the market – apologies to Simon and Garfunkel’s “The Boxer” – to just hear what he wants to hear and ignore the rest, or is Powell just bad at it? ? “There’s a bit of both,” said Art Hogan, chief market strategist at B. Riley Financial. “It’s not for lack of trying. Chairman Powell is really trying to drive home the point that the fed funds rate has to be restrictive to keep inflation in check. The problem is, it’s a moving target.” The most recent example of the communication breakdown between Powell and the market came after a Nov. 30 speech at the Brookings Institution in Washington, DC. In those remarks, the president said a cut to a 0.5 percentage point increase could “come as early as the December meeting.” However, it was made even clearer that “restoring price stability”, i.e. reducing inflation, “will require keeping policy at a restrictive level for some time. history strongly cautions against easing policy prematurely. We will stay the course until the job is done.” Markets, however, chose to focus much more on the first part of those remarks, sending stocks higher and propelling the Dow Jones Industrial Average over 700 points that day. Another day, another message Monday, however, the story had changed. A Wall Street Journal article ahead of the Fed’s “calm period” ahead of the Dec. 13-14 meeting reiterated the view that while a 50-basis-point upside decline was indeed coming, the likelihood that the Fed will be in a higher mode for longer on rates. That sent stocks into a tailspin that wiped out much of Wednesday’s gain. Markets added to those losses with another selloff on Tuesday. If the story sounded familiar, it’s because a similar scenario unfolded over the summer. At his news conference after the July meeting, markets latched onto a comment from Powell that “it will likely become appropriate to slow the pace of increases” after the Fed deemed its policy restrictive. Investors, however, saw no qualifier in the statement and embarked on a week-long rally to try to exit the 2022 bear market. A month and a half later, Powell delivered an unusually terse speech at the of the Fed’s annual summit in Jackson Hole, Wyoming. The brief comments noted that the Fed would keep rates higher “for some time,” promised that policymakers would “use our tools forcefully” to fight inflation,” and warned that tight monetary policy would likely result in “some pain” for the economy. red flag at Jackson Hole and numerous caveats in his speech last week, markets are still struggling to understand the Fed’s message. using the well-known nickname of the president. “He was pretty harsh. Jackson Hole couldn’t have been a better example of that: a very short, very hawkish conversation 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 The meeting will likely include that half-point rate hike the market has been waiting for, but should also see more clarity from Powell’s part that the fight against inflation is far from over and that anyone looking for lower rates soon Krishna Guha, head of global policy and central banking strategy at Evercore ISI, wrote that the experiences recent months show that “managing financial conditions is not easy, [and] Powell may not be particularly good at this as he seems to struggle to maintain a consistent tone from one set of remarks to the next. December,” Guha added. The Journal article particularly emphasizes the likelihood of Powell stressing that rates are unlikely to drop anytime soon. Central bank officials have repeatedly said they are largely unimpressed with the latest data showing a and Friday’s nonfarm payrolls report actually showed that wage pressures remain dominant in a tight labor market. Markets, however, have shown a clear willingness to accentuate the Fed’s positive, so Powell’s job, again, will be to manage expectations. he is used to engaging in competing monetary paths, at least in the way the market interprets his comments, he is not guaranteed to deliver what the market wants next week. That’s not to say he’s going back to the fast money lane, but rather that he might alter 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 until the December 13-14 meeting and the press conference that follows, to see what monetary path the Fed chair really is on,” she added.
#Fed #Chairman #Powell #problem #communicating #market