Powell is still a dove at heart

Following a fairly terse opening statement where the Fed noted that there has been a lack of inflation progress of late, Powell’s press conference ultimately delivered a fairly dovish surprise. Chair Powell still expects inflation to decelerate this year and considers it unlikely that the next policy move will be a hike rather than a cut. (Oh, and the Fed kept rates on hold today, obviously. And quantitative tightening is set to slow, but not stop.)

Recent developments

Recent upside inflation and wage surprises have meaningfully shifted the market’s rate expectations. From the start of the year, when consensus was for seven to eight rate cuts this year to now expecting just one cut, market forecasts have undergone a major upheaval. Fed officials have also introduced significant hesitation and uncertainty around their disinflation narrative, while several market commentators have even started to discuss the possibility of further rate hikes.

As a result, coming into today’s FOMC meeting, the baseline market expectation was that Powell would emphasize a “high for longer” stance and firmly push back on the prospect of imminent rate cuts, but that also came with a palpable sense of fear from markets that Powell may potentially give a nod to the possibility of rate hikes.

The press conference

While recent upside inflation surprises have dampened some of Chair Powell’s spirit, his optimism is still alive and kicking.

• He remained very upbeat on the strength of the U.S. economy, dismissing talk of stagflation and even commenting, “I don’t see stag or flation.”
• He believes the labor market is coming into better balance.
• He maintained his expectation that inflation will revert to its downward trend later this year. (He did, however, admit that he has lost some confidence in that scenario).
• He considers financial conditions to be tight.
• He noted that “over time” the current level of rates will prove sufficiently restrictive.

In other words, he still believes that the next move in policy rates will be down rather than up, and even stated that a rate hike is unlikely. He did, however, emphasize that the Fed will maintain rates at current levels for as long as necessary.

Policy path forward

Chair Powell still sees rate cuts as a possibility this year but admitted it will take longer to get started than the Fed initially expected. Markets will be pleased with his dovish tilt and assertion that the policy discussion was “about holding the current level of restriction” rather than the potential for further rate hikes.

Nonetheless, it is worth remembering that this is the same Fed who thought inflation was transitory, and who danced a victory lap as recently as late-2023 that inflation was conquered. The reality is that the near-term policy path is highly uncertain, and the Fed will be responding to the unfolding economic data just as we all are.

It is possible that the Fed will cut policy rates twice this year, starting in September. But that will require an almost immediate and convincing resumption of the disinflation narrative. The policy rate path forward has rarely, if ever, been as uncertain as it is today.