The Fed has an incredibly tough job, and I’d be arrogant and foolish to claim I could do it better.
But now that I’ve tipped a hat toward “the high road,” let’s detour to “the low road” because there is at least one way I would have been different…
Consistency.
We can thank Federal Reserve Chairman Jerome Powell and his inconsistency for the recent market volatility, and frankly, it’s been unnecessary and frustrating.
If we look back at last year, Powell and Co. did an admirable job of one thing – sticking to their hawkish script.
Wall Street second-guessed them at every turn, but the Federal Reserve members largely maintained cautious perspectives and didn’t give the bulls much to hang their hats on.
That was crucial.
As to “why,” think of a jilted lover, desperate for any sign of reconciliation with the former beloved, interpreting everything as evidence that a rekindled romance is coming.
Similarly, Wall Street has been desperate for any sign of reconciliation with a formerly-dovish Fed, interpreting everything as evidence that a rekindling of market-supportive policy is coming.
Now, if you’re the former beloved in this situation, what’s your cardinal rule?
If you’re kind, you don’t give false hope.
Even if you’re mulling a reconciliation, you don’t vocalize that as a possibility until you’re 100% certain it’s what you’ve decided. Otherwise, you’re just toying with emotions.
That’s all Powell and Co. had to do – stick to their hawkish script until they were sure that a change of direction was warranted.
Let’s rewind to the Fed’s February FOMC meeting. You’ll recall that Powell shocked everyone by sounded more dovish than had been expected.
From our Digest on February 3rd:
Regular Digest readers know that we’ve been chronicling the ongoing “poker match” between Wall Street and the Fed…
…After Wednesday’s press conference with Powell, the edge has to go to Wall Street.
…Powell sounded more dovish than usual. He even acknowledged that the Fed would factor in the speed of disinflation into its policy plans.
This resulted in the months-long disconnect between the Fed and Wall Street becoming even more glaring…
It will be interesting to hear whether Powell walks-back any dovish-interpreted comments and/or talks-down the market rally in his upcoming speaking engagements.
If not, then bears should take note.
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I was hardly the only one surprised by Powell’s unexpected dovish tilt.
From Bloomberg, following the February FOMC meeting and Powell’s press conference:
Behind closed doors, Federal Reserve policy makers worry rallying markets are impeding their efforts to control inflation. But every time Jerome Powell goes out in public, he gives them more room to run…
Powell may have intended to deliver a stern message that the Fed still had a lot of work to do to tame inflation [at his press conference on Wednesday], but that’s not what investors heard.
Instead, they heard a chairman who indicated he was seeing clear evidence of slowing consumer price increases and who didn’t seem particularly bothered by the January rally in markets…
Coming into the February FOMC meeting, the Fed party line had been “we’re seeing some progress on inflation, but not enough to convince us. More work to do!”
Okay, well, then why not continue with the 50-basis-point hikes?
“Well, Jeff, it’s because they didn’t want to overtighten.”
Nope, that’s not what the Fed had been saying for months.
The party line, delivered repeatedly in various forms, was “we’d rather go too far than not far enough. After all, if we go too far, we can pull back through accommodative policy. But if we don’t go far enough, we don’t fix the root of the problem and inflation burns up the economy.”
Despite this, the Fed downshifted in February to a 25-basis-point hike.
Wall Street bulls interpreted this as a dovish “we’re getting back together” message. Can you blame them?
But then economic and inflation data came in hotter than expected, and Powell reverts to his hawkish ways, throwing cold water on Wall Street’s hopes.
One month ago, Wall Street’s expectation for a 50-basis-point hike in March was just 9.2%. As I write, it’s exploded to 77.9%.
Understandably, asset prices have been rising and falling based on which prevailing sentiment, hope or fear, wins the day.
It didn’t have to be this way.
Powell and Co. didn’t have to dangle dovishness, but they did, and now we’re dealing with their flip-flopping.
From CNBC:
[Earlier this week] Fed Chairman Jerome Powell told a Senate committee that if inflation data stays hot, the central bank likely will raise rates more than it had expected and at a faster pace.
Prior to that, Powell’s recent remarks had indicated that he was seeing signs of disinflation in the economy and had hopes that the Fed could at least hold the size of its future rate hikes to 0.25 percentage point, or 25 basis points.
“Let’s not have a new layer of policy-induced volatility on top of things. But that’s what we are getting,” said El-Erian, chief economic advisor at Allianz.
“It’s a flip-flopping of policy guidance” …
El-Erian said much of the economic anxiety can be laid at the feet of Fed officials, who he said should have held to their more aggressive hikes rather than the 25 basis point increase approved Feb. 1.
“If you stay at 25, you fall further behind on the inflation front,” he said. “It’s a hole that they dug for themselves, and they keep on digging.”
And that’s soft economic and inflation data, which points us toward tomorrow…
The release of the February jobs report tomorrow morning is huge.
As we profiled in yesterday’s Digest, the potential for downward revisions in January’s report, plus evidence of a tighter market in February, would be very bullish.
And as soon as we digest tomorrow’s data, we get another batch next Tuesday and Wednesday with the latest Consumer Price Index and Producer Price Index reports.
If everything comes in cool, then Powell and Co. might be able to get away with keeping their hike-size at just 25 basis-points at its March FOMC meeting in two weeks.
If not, then we’ll get 50 basis points and potentially more market volatility that was unnecessary and preventable had Powell just stayed the hawkish course.
We’ll end today by repeating the same quote from Josh Brown, CEO of Ritholtz Wealth Management, that we featured following Powell’s dovish pivot in February:
Now listen up and listen good.
Last May 4th, Fed Chairman Jay Powell told a press conference that “A 75 basis point increase is not something that the committee is actively considering.”
Five weeks later, the Fed hiked rates by 75 basis points. Then he did another 75 basis points, then another 75 basis points, then another 75 basis points. Four in a row.
So today, when Powell goes out of his way to tell you how high rates are going to go and for how long they’ll stay there, remember that he doesn’t even know what they’re going to be doing next month, let alone by the end of the year.
The Fed’s forecasts are as worthless as anyone else’s. That’s why they say they are “data dependent.”
Invest like an adult, not a child who believes in clairvoyance.
Have a good evening,
Jeff Remsburg
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