Stocks opened lower today in anticipation of a hawkish speech from Fed Chairman Jerome Powell. The Dow, S&P, and Nasdaq Composite mostly traded sideways through noon before Powell spoke at 12:40 pm EST.
The Fed Chairman, in an interview before the Economic Club of Washington, doubled down on his post-FOMC comments from last week. Analysts had speculated whether Powell intended to lean dovish in his press conference after the Fed raised rates by 25 basis points.
As it turns out, he meant every word. How the market interprets those words is also clearly not of Powell’s concern.
“The disinflationary process, the process of getting inflation down, has begun, and it’s begun in the goods sector, which is about a quarter of our economy,” Powell said.
“But it has a long way to go. These are the very early stages.”
Mentions of the “disinflationary process” in last week’s remarks sent shares higher. Today, the “d-word” managed to do it again.
“We expect 2023 to be a year of significant declines in inflation. It’s actually our job to make sure that that’s the case,” Powell added.
“My guess is it will take certainly into not just this year, but next year to get down close to 2%.”
He also said that the Fed’s message last week was that bringing inflation lower “is likely to take quite a bit of time, it’s not going to be smooth,” and “it’s probably going to be bumpy.”
On future rate hikes, Powell said, “we think that we’re going to need to do further rate increases, as we said, and we think that we will need to hold policy at a restrictive level for a period of time.”
That doesn’t sound very dovish, does it? In fact, Powell was quite hawkish in most of his comments. Very little he said this afternoon was new relative to last week’s post-FOMC press conference.
Powell also explained in the interview that the latest jobs report confirmed that “the economy is strong.”
Stocks seemed to ignore the hawkish parts of Powell’s comments and instead focused on the “economy good, inflation going down” portion.
At least, until 1 pm EST hit and the market whipsawed lower.
The S&P dipped back into the red as retail traders and algorithms sobered up.
“The market (could it be algos?) again seems to take the word ‘disinflation’ and give it a greater significance than it should have,” wrote Bloomberg’s Ira Jersey.
“[But] the caveat of ‘early’ in the process just solidifies my view that the Fed won’t be cutting this year, which is different than the market is pricing.”
It seems like Powell is preparing the market for a year of higher rates while paving the way for rates above the median target (currently just above 5.0%) should inflation rebound. The soft landing talk (and strong jobs reports) would give the Fed something to point to when lifting rates.
And so, last week’s rally in response to Powell’s post-FOMC speech was likely nothing more than a translation error by investors, most of whom put far too much stock into the “disinflationary process.”
Powell’s trying to get the market ready for a year in which there probably won’t be any rate reductions. Whether investors understand that or not isn’t his problem.
