What to Expect Now After the Fed's 'Hawkish 50'
Here are my key takeaways after listening to Fed Chair Powell and how things may play out from here.
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We've already shared our quick thoughts on the Fed statement and after the SEP/DOTS. You can read those here.
Here are my additional thoughts after Fed Chair Powell's press conference:
Very “balanced.”
My take is that the “path” the Fed laid out is very dependent on inflation getting below 2.5% and closing in on 2% (he still uses 2%, but I think he means 2.5%). I think inflation is heading lower, but we are open to months of upward surprises.
On the jobs front, we have argued that they are making several mistakes, including seasonal adjustments. They seem to be trying to fix things like the birth/death model. On “seasonals,” it adds too many jobs in January–April and takes too many away from June–September (geographic demographic shift and including data during Covid closing and re-opening). We almost need jobs to deteriorate to keep on their projections and we are about due for some upside surprises.
If we aren’t getting below 3% until the end of 2026, we are pricing in too many cuts too quickly. I also think that the 3% will ramp up over time (which has been the trend).
All in all, think this is as close to a “Hawkish 50” we could get. Maybe close to “Neutral 50” but I give Powell credit for not turning too dovish during the press conference.
Expect selling in stocks and bonds, partly on Fed disappointment, but primarily because positioning became too extreme versus what was delivered.
For now, 50 bps more this year seems a certainty, and it is probably harder to get to only 25 rather than 75, but I’m not sure that is a zero probability given the preponderance of information we were delivered today.
If the Fed speakers in the coming days steer towards neutral, we can rally across the board, but we haven’t seen that yet.
Finally, tune in to Bloomberg TV bright and early Thursday at 6 a.m. to get Academy's thoughts going forward, having had time to digest everything in more detail!
