Powell Post-Mortem: "Volcker Has Left The Building" And "We're Not In Wyoming Anymore"
One week ago, when summarizing Powell's unexpectedly dovish post-FOMC press conference, we retorted to the Fed's WSJ mouthpiece Nick Timiraos that the "Keyest takeaway: Burns 2.0 just steamrolled Volcker 2.0."
Keyest takeaway: Burns 2.0 just steamrolled Volcker 2.0 https://t.co/OQixemDItY— zerohedge (@zerohedge) February 1, 2023
Wall Street, where bearish sentiment continues to dominate...
... did not like this assessment, instead arguing that the bulls only heard what they wanted to hear, that Powell was much more hawkish, etc, etc, and that the real Powell would be revealed today during his interview with David Rubenstein at the Economic Club in Washington, where he would shock the world with his unabashed hawkishness, or something. That did not happen, instead here are the highlights.
- Disinflation has begun but has begun in the goods sector, about 25% of the economy. Long way to go and it will not be smooth, it will be bumpy move lower.
- Labor market is extraordinarily strong. It’s good that inflation is coming down as we have not seen this before with a strong labor market.
- Powell says that he sometimes gets the data the night before but only him with no clarification on which types of data that he receives.
- On rate cuts by year-end, are markets wrong to remove those cuts? He had a data dependency type of response.
- Not considering changing the 2% target
- The shortage of workers feels more structural than cyclical, which is a problem.
- Says labor market is “at least at maximum employment” which he defines as when a person wants a job, they can get a job. Says we may be beyond max employment. As JPM explains, this is the fear factor that full employment triggers inflation. If last Friday’s print is true, it seemingly disproves the hypothesis.
- QT is passive not active and will take a couple years to get to a comfortable level. MBS sales are not on the list of active discussions.
Some more from JPM chief economist Michael Feroli:
Powell’s remarks today at the Economic Club of Washington were pretty similar to what he said after last Wednesday’s FOMC meeting: disinflation has begun, it has a long way to go, and further interest rate increases are likely needed. While he gave no sense that he was aiming to “set the record straight” after the perceived dovishness of last week’s presser, he did warn that the peak in the funds rate could be higher, particularly if the labor market remained strong. In short, this was a message of data dependency.
Anyway, Powell's speech has come and gone, and just as we warned last night, not only did he not flip his post-FOMC dovishness (instead beat the data-dependency drum), but with positioning so bearish ahead of his speech today, stocks suffered a blistering delta squeeze (this is how JPM's desk framed it: "For bullish Equity investors, Powell’s speech was a welcome outcome: assuming the majority of the balance of Fedspeaks this week is in the Bostic camp (2x more hikes, avoid a recession, etc) Powell’s speech today could help balance the view." More amusingly, it was what we said last week after the first Powell appearance, that prompted BofA's chief economist Michael Gapen to title his Fed Watch post-mortem note today "Volcker has left the building: Hoping for painless disinflation." At least he didn't say Volcker was steamrolled by Burns...
Here's why the chief economist at BofA agrees with what we said one week ago:
Volker has left the building: Hoping for painless disinflation
In remarks today at The Economic Club of Washington, DC, Chair Powell said that the stellar January employment report did not fundamentally change his view about the outlook for monetary policy, though it did “underscore” his belief that reducing inflation to the 2% target would likely “take time” and involve “ongoing rate hikes.” He added that continued strong employment gains could mean a peak policy rate above where markets are currently pricing (circa 5.0-5.25% based on federal funds futures contracts).
As he did during the press conference following the February FOMC meeting, Powell clearly stated that he believes the disinflation process has begun. That said, he emphasized that it is only clear in goods prices, which are only 25% of core CPI, while the process has yet to show through in services inflation. He said he continues to expect that housing services inflation will slow “in the second half of this year” and nonshelter services inflation will cool when wage growth cools. In addition, he said non-shelter services inflation is his “biggest worry” when it comes to the outlook for inflation.
It is what Gapen says next that goes on to explain the market's eventual meltup, and close at session highs: i.e., "We’re not in Wyoming anymore"
As we noted following the February FOMC meeting, Chair Powell appears to have embraced recent disinflationary trends and expressed optimism that it will continue. In our view, Chair Powell is placing more weight on an “immaculate disinflation” scenario, where inflation pressures subside without some softening in labor market conditions, including higher unemployment. This stands in contrast to the Powell from Jackson Hole, Wyoming, last August, who leaned strongly into doing whatever it takes to bring inflation down and emphasized that inflation was unlikely to subside without some “pain” in labor markets. To be fair, Powell did say the Fed’ s baseline includes a softening in labor markets, but it took forty minutes of continued questioning to get to this answer.
A slightly different way of saying the same comes from JPM's Feroli who writes:
Late last year Powell and other Fed speakers seemed intent on managing market expectations. More recently, they appear content conveying that they will respond to the data and letting the market take that as fair warning. This is sensible. While Powell has recently questioned the market’s more benign inflation forecast, he hasn’t protested it too strongly—after all doing so would be asserting with vigor that the Fed will miss its inflation target. Nor has he committed to maintaining restrictive rates for a certain amount of time. Instead, he’s emphasizing what conditions require more or less restraint. Last year the Fed guided the market for many steps of the way, which was easier when the goal line was far away. This year, the market shouldn’t expect the same degree of hand holding.
Incidentally, BofA's Gapen is less sanguine about a favorable, "immaculate" outcome: "In terms of our outlook for monetary policy, we cannot fully rule out “immaculate disinflation” outcomes. We, too, are optimistic about being past peak inflation and have inflation falling back to the Fed’s 2% by then end of 2024. That said, we would be surprised to see inflation fall all the way back to 2% without a reconciling of the imbalance between labor demand and labor supply. The labor market remains exceptionally hot, labor demand far exceeds labor supply, and, although wage growth has moderated , it continues to run at rates above what the Fed believes is needed to achieve its inflation mandate."
It's unclear how the market interpreted that last bit, but judging by the double reversal in stocks and final surge in risk (as well as yields) to close the day, traders were confident enough that "Volcker leaving the building" is good enough to push spoos back to 4300 which appears to be the market's next destination, at least until such time as bears like Marko and Wilson capitulate.
More in the full note available to pro subs.