Jerome Powell, the relatively new chair of the Federal Reserve, had a pretty remarkable press conference on Wednesday. He spoke about the current state of the economy and described the Fed’s monetary policy. During the FOMC meeting, Powell repeatedly stressed the importance of proceeding with caution given the uncertainty that hovers over the current economic landscape. The market is currently pricing in just over three Fed rate cuts for the year. What Powell didn’t do was signal that the path of least resistance is for rates to go higher still.
The Fed is tasked with a tricky balancing act, debating which risks to prioritize — raising unemployment or continuing inflation. Powell’s comments throughout the press conference conveyed a clear sense of determination to move through this complexity while continuing to pursue economic stability. He dismissed the meeting as a rubber stamp affair. Most market financial analysts echoed his sentiment, arguing that the Q&A didn’t provide any real surprises regarding upcoming rate changes.
No surprise then that market expectations surrounding rate cuts shifted significantly during the presser. The odds of a rate cut at that meeting fell from more than 30% to a paltry 20%. Indeed, expectations for a July cut still were quite high. They did go down a little, from 67% to 62%. Futures investors are looking for even deeper cuts, though they are retooling their forecasts. This change reflects Powell’s glass-half-empty view of the world.
Powell suggested that a major positive revision to the U.S. Q1 GDP report is on its way. This possible change would go some way toward easing fears about an upcoming recession in the United States. The promise of better fiscal returns can only reinforce confidence across the board, among economic actors both in DC and on Wall Street.
While he spoke at the press conference, financial markets were showing remarkable volatility. The interest rate on the 10-year Treasury fell modestly, but the 10-year and 2-year Treasury yields were virtually flat. The USD/JPY exchange rate increased by 0.8%. This uptick made up for a portion of the yen’s recent strength against the dollar this month. These movements are indicative of Powell’s impact on overall market perceptions around the hawkishness of Powell’s comments showing the future direction of monetary policy.
In spite of the gloomy mood, Powell was deliberate with his desire to calm fears. He didn’t want to telegraph a future rate hike. His all of the above approach shows that he understands a strategy focused on minimizing market upheaval, while tackling the economic headwinds we face. Our analysts were quick to see that the initial market reaction was a sell-off in equities and other risk assets. This reaction highlights how jittery investors are to the Fed’s policy signals.