Get ready for the Powell pain.
The markets mostly misread Federal Reserve Chair Jerome Powell’s speech at the Brookings Institution last week. In particular, the question-and-answer segment seems to have led many investors to believe that Powell was taking a dovish approach to interest rates. A closer reading of his remarks, however, indicates that this is a misinterpretation.
We suspect that Powell did want to sound a bit easier than he did back at Jackson Hole, when he had to convince investors that the Federal Reserve was not going to flinch at the first signs of an economic slump. The market, however, appears to have read Powell’s softer tone as an invitation to ease financial conditions to an extent that the Fed is likely to view as unhelpful in the fight against inflation. In short, it over-compensated.
As we pointed out last week, Powell is an “average” guy. He does not look at a single month’s number—say, the October Consumer Price Index (CPI)—and decide that his mission has been accomplished. In fact, when asked at Brookings about the softer-than-expected October CPI, Powell was dismissive. He described it as “a single month’s data, which followed upside surprises over the previous two months.”
We expect Powell will lean hawkish in his press conference this week in an attempt to correct the dovish interpretation of his Brookings talk.
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