Ahead Of The Fed – Will Powell’s ‘Inner Dovishness’ Shine Through?

Authored by Peter Tchir via Academy Securities,

Ahead of the Fed

There is very little excitement about this meeting, as the range of possible outcomes seems relatively narrow.

We all know there will be no cut this meeting. There should be an outline of how the Fed will “taper” quantitative tightening. It should be a mild positive for stocks and bonds, , but unless it is surprisingly aggressive it has been largely priced in.

We could see some tweaks to the language. They could highlight any signs of economic weakness (GDP was surprisingly low, after all). That would be positive for stocks and bonds. Far more likely are concessions to inflation being stubborn. So much is priced in, on that front, it shouldn’t be market moving.

The real show will be the press conference. I keep thinking of “self-affirmation” by Stuart Smalley from SNL. Powell standing in front of a mirror trying to harness his inner dove, so that he can actually come across as hawkish.

The market is letting him be quite hawkish. The market, according to probabilities based on futures, calculated by Bloomberg (WIRP function), is not pricing in a full cut until December.

The Fed often likes to be led by markets (though they were not sucked into the 6 cut euphoria from late last year). He has every opportunity to sound hawkish and confirm the current market sentiment.

Yet, he has a history, or reputation, or perception, of not being able to control his inner dovishness during press conferences.

No matter what his intention was, he always seems to come across as dovish.

Will he do that again?

Keep hopes of June/July cuts alive? (market is pricing in a 25% chance of 1 hike before September).

This would trigger a nice rally in rates (across the curve, though more at the front end) and would be good for stocks.

Or, will he stand his ground, and try and put a hike back on the table. At this point, the market is still leaning heavily towards a cut this year, and very little discussion of another hike. If he starts discussing “balanced risk” etc., and puts a hike back on the table, the market would likely assume sooner than later (what Fed wants to hike right before an election?). I think we would see yields rise, especially at the front end, and stocks drop rather quickly (much like near the close of yesterday’s weird session).

I find it hard to believe that Powell will maintain a hawkish persona, but that is the potential surprise for markets.

It should be a dull meeting as a mostly hawkish Fed is priced in, and that is what Powell is likely to deliver, even if he goes into the press conference planning on being more hawkish.

Then we can get back earnings and the volatility those have been creating.