The market’s dovish price-action response to the perception of "past peak tightening" from the Fed remains mutually exclusive from what was a "still hawkish on inflation" message, as Chair Powell did not stand-down there - repeating that it is the only mandate and largest challenge right now, outweighing any growth (i.e. “recession”) concerns.
“We're going to be focused on getting inflation back down and as I've said on other occasions, price stability is really the bedrock of the economy. Nothing works in the economy without price stability. We can't have a strong labor market without price stability for an extended period of time. We want to get back to the kind of labor market we had before the pandemic where differences between racial and gender differences and that kind of thing were at historic minimums. That's not going to happen without restoring price stability. So, that's something we see as, as something we simply must do. And we think that in the -- we don't see it as a trade-off with, with the employment mandate. We see it as a way to facilitate the sustained achievement of the employment mandate in the longer term.”
And Nomura's Charlie McElligott points out that this is how things can get "awkward" again in coming months to keep things "uneasy" versus the perception of “dovish pivot,” as Powell’s repeated emphasis on the June SEP (which shows ongoing rate hikes into 2023) looked clearly “intentional,” which would then seemingly push-back on the market’s “quick turn” pricing of early rate CUTS seen in start 1Q23...
As McElligott notes, this then reiterates the “higher rates for longer” dynamic that will continue to drag on growth and increases the odds of “hard landing” recession - which Powell himself acknowledged yesterday:
“We know the path has narrowed, based on events outside our control and may narrow further.”
And all against a Fed which will need to get back to keeping the pedal down as it pertains to tightening still “too easy” FCI, as we wait for “clear and convincing” evidence that the inflation trend has turned sustainably “lower” - which again is very reasonably going to happen as we get to 5-6% in coming months and quarters - but it is going to take a much harder “growth crash” to see any eventual return to a 2% target...
As we highlighted earlier, Nomura's rates strategist Ryan Plantz capturing the dichotomies and hypocrisies in Powell's positioning and the market's reaction:
“However, the near team is going to still be a hawkish Fed. Just a reminder that what goes up must come down in our view, which is why the near term reaction function of hawkishness against inflation will ultimately be the driver for slower economic output in longer dated forwards. The bottom line is the economy is far too fragile to handle this type of tightening in the medium term as the Fed keeps the pedal down.”
Crucially, McElligott concludes that the market should be careful what it wishes for...
...the issue is that the market’s “anticipatory” dovish price-action on said “tightening phase-shift” is that it did the exact thing that makes the Fed’s inflation stifling efforts now that much more challenging, because since the press conference, markets are “impulse EASING” in financial conditions proxies, while inflation proxies then have jumped HIGHER in extremely counterproductive fashion.
In other words, the more the market 'looks thru' the recession to the easing and rallies... the harder The Fed will tighten to achieve its inflation-fighting contraction of financial conditions.
And the path-dependence of that blinkered view of imminent QE means some serious pain ahead for those hoping the worst is behind us.