Fed Watchers Say Markets Got It All Wrong on Powell ‘Pivot’

(Bloomberg) — Federal Reserve Chair Jerome Powell is raising interest rates at the steepest pace in a generation and he said Wednesday that another big increase is possible. Yet investors sent stocks surging on his comments that the hikes will eventually slow.

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Some Fed watchers say markets read Powell’s press conference too narrowly.

Economists pointed out that the Fed’s top focus remains curbing inflation, even if it comes at a cost to employment, the other side of the central bank’s congressional mandate. In addition, Powell cited forecasts in mid-June that showed officials expected to raise rates to about 3.4% this year and 3.8% in 2023 — projections that are above market expectations.

That so-called dot plot, which the Fed will next update in September, were the best current guide of were the Fed was heading this year and into 2023, Powell said.

“The markets shot first and asked questions later,” said Neil Dutta, head of US economic research at Renaissance Macro Research LLC. “I don’t think inflation is going to be cooperating in a way that makes cuts plausible. Powell said repeatedly the economy needs to slow down to meet their goals. A modest recession probably won’t do the job. They are going to have to do more.”

Piper Sandler’s Roberto Perli and Benson Durham, noted that the jump in stocks, and larger decline in short-term yields than long-term rates is the “classical market reaction one would expect if the odds of rate cuts had increased or their timing had been brought forward.”

But Powell’s comments were “not the words of a Fed chair who is pivoting towards a dovish stance,” wrote ex-Fed official Perli, the firm’s head of public policy, and Durham, head of global asset allocation.

“The markets clearly think the net of today is that the Fed will end up doing less tightening, but it was hard to come away from the Fed press conference thinking the Fed delivered a dovish pivot,” analysts at NatWest Markets said in a note. “If anything, based on what we heard today, the median Fed member’s view on the path of the Fed funds rate over the remainder of this year could conceivably be higher.”