You say ‘dovish’ and I say ‘hawkish’

After Powell spoke, stock prices
DJIA,
+1.37%

SPX,
+2.62%
rose sharply and bond yields
TMUBMUSD02Y,
2.984%
declined more at the short end than the long end, clear signs the market thought Powell was dovish.

But Robert Perli, head of global policy at Piper Sandler, disagreed with this conclusion.

“The press conference was hawkish,” he said.

“All Powell could do at the press conference today was talk about how inflation was too high, how the Fed is determined to bring it down, and implicitly how he would be willing to tolerate a recession if that’s what’s needed to get the job done,” Perli said.

The market latched on to Powell’s statement that slowing down from the pace of 0.75-percentage-point rate hikes will likely be appropriate “at some point.” Perli said this is “obvious” as the Fed can’t continue on that pace forever.

The market also liked when Powell said the Fed was moving to a new “meeting-to-meeting” phase, perhaps believing that a peak in interest rates is near.

Perli said that’s a misreading and Powell doesn’t want to give guidance because there is so much uncertainty.

Scott Anderson, chief economist at Bank of the West, said the lack of forward guidance from the Fed could increase interest-rate and stock-market volatility around important U.S. data releases, especially on inflation “as investors try to determine what it might mean for the pace of additional rate hikes and the terminal peak for rates in the current tightening cycle.”

Powell ‘bobs and weaves’ on recession

Powell managed to “bob and weave” around the questions of recession, said Josh Shapiro, chief U.S. economist at MFR.

Powell said the Fed wasn’t trying to create a recession and did not expect one, and also that we are not currently in one. He refused to categorically state how it would affect the Fed’s policy path if one materialized, Shapiro said.

The Fed chairman said there was still a path to bring inflation down while sustaining a strong labor market.

“We continue to think that there is a path [to a soft landing]. We know the path has clearly narrowed…and may narrow further,” he said.

Powell said the Fed is determined to bring inflation down, and this likely means a period of “below-trend economic growth and some softening in the labor market conditions. “

What about September?

Powell kept the door open for another “unusually large” 0.75-percentage-point hike in September, but said it would depend on the data.

Carl Tannenbaum, chief economist at Northern Trust, noted that Powell suggested that the year-end fed funds rate would be in the range of 3.25%-3.5%. That is another 100 basis points higher, which the Fed might prefer to accomplish with a 50-basis-point increase followed by two 25-basis-point hikes, rather than going from 75 basis points in September, to 25, then to zero. Powell “sounded marginally less hawkish to me,” he said.

Balance-sheet plans

Powell said the Fed’s program to shrink its balance sheet is working and markets “should be able to absorb this.” He said the plan was on track and could take two to two-and-a-half years.

Some economists have starting to forecast the Fed will end the “quantitative tightening” program next year.