Fed watchers say markets got it all wrong on Powell 'pivot'

Some Fed watchers say markets read Mr Powell's press conference too narrowly. PHOTO: EPA-EFE

ATLANTA (BLOOMBERG) - Federal Reserve chair Jerome Powell is raising interest rates at the steepest pace in a generation and he said on Wednesday (July 27) that another big increase is possible. Yet, investors sent US stocks surging on his comments that the hikes will eventually slow.

Some Fed watchers say markets read Mr 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 United States central bank's congressional mandate.

In addition, Mr Powell cited forecasts in mid-June that showed officials expected to raise rates to about 3.4 per cent this year and 3.8 per cent in 2023 - projections that are above market expectations.

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

"The markets shot first and asked questions later," said Mr Neil Dutta, head of US economic research at Renaissance Macro Research. "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 head of public policy Roberto Perli and head of global asset allocation Benson Durham noted that the jump in stocks, as well as the larger decline in short-term Treasury 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 Mr Powell's comments were "not the words of a Fed chair who is pivoting towards a dovish stance", wrote Mr Perli, who is a former Fed official, and Mr Durham.

NatWest Markets analysts said in a note: "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.

"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."

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