Is a great monetary pivot near as central bankers engineer a once-unthinkable soft landing in the world’s largest economy. It seems, finally, and for now, Wall Street traders and the Federal Reserve are on the SAME PAGE.
Wednesday was quite a day, which took an unexpected turn when the FOMC, the quarterly “dot plot” or survey of economic projections, and then Powell’s 45-minute press conference, all came as close to promising early rate cuts as a central bank could ever do. It smelt like a pivot was on the cards.
Sure, the FOMC wanted to leave a possible rate hike “on the table,” and said it intends to carry on shrinking its balance sheet by selling off bonds, which all else equal will tend to tighten monetary policy. But the direction of Powell’s comments was unmistakable. The Fed is now only too happy for the market to price in imminent rate cuts.
This was not what I had expected, given the recent data. Remember all the focus the Fed has directed to so-called “supercore” inflation (services excluding shelter), which was higher in November than in October on both a month-on-month and year-on-year basis?
But, no, in a rather remarkable press conference, the signals were sprinkled through the 45 minutes, as he said policy was now “well into restrictive territory” (not merely “restrictive” as he said in November, when conditions were tighter than now).
The markets reacted by pushing most asset prices higher, taking bound yields lower. The two-year yield, most sensitive to near-term rate cuts, its minute-by-minute moves show that it was taken by surprise. After a dive when the dot plot was published, it managed to fall significantly further as Powell spoke.
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