It was almost exactly one year ago when we wrote that every time Federal Reserve Chairman Powell spoke after a board meeting, it was toxic for markets. What a difference a year makes. This week’s Fed meeting and subsequent press conference set off a strong rally on Wednesday and Thursday, vastly different from what we saw last year.
The shortest explanation of “why” this happened is that market participants heard precisely what they wanted from Powell and saw exactly what they wanted in the Summary of Economic Projections (SEP). To understand the details, we’ll review a few of Powell’s critical words and phrases.
“Over time”: Chair Powell used this phrase six times while answering the first two questions after his prepared remarks. He used it while discussing their commitment to returning to 2% PCE inflation. The interesting takeaway is that while the phrase is intentionally vague, the SEP gives us the committee’s best estimate of when this might happen.
Looking at the picture above, it may be startling, but they are not expecting PCE to return to 2.0% until the end of 2026. So when Powell says “over time,” he gives the Fed almost three more years to return to their target. It is essential to remember that as we get monthly inflation data because they are playing the long game. Deviating from their current plan would likely take multiple months of inflation moving in the wrong direction.
“Progress”: Regarding inflation trends over the last year and strong but easing tightness in the labor market, Chair Powell spoke of “considerable,” “significant,” “good,” and “ongoing” progress. This word shows that the committee is moving in the right direction on its dual mandate of maximum employment and stable prices.
However, it is also a word that underscores there is no magic line in the sand that will sound the “all clear.” The economy and all of its measures will continue to evolve. The committee is aware that moving a ship this large takes time, and as long as the momentum is moving in the right direction, we should continue to make headway.
“Uncertain”: This is a word Chair Powell used regularly to describe the economic outlook, the path forward, and the timing of potential rate cuts. As can be appreciated, with virtually unlimited variables, there can be only minimal certainty around their projections. One sentence in his prepared remarks evidenced this best.
“We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. The economic outlook is uncertain, however, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.”
In this one sentence, you can get a feel for how small of a needle they are trying to thread. First, they state that they believe rates have peaked for this cycle. Then, they think that, given the trajectory, rate cuts will be warranted this year. But don’t get over your skis because there is so much uncertainty; if we have to, we’ll keep rates at this level.
Nevertheless, taken in aggregate, the message seems relatively clear. It appears the Fed will need a strong reason not to cut rates later this year instead of needing to find a reason to cut rates.
Economy
- Markets were very pleased with what Chair Powell had to say, with the S&P 500 up 2.3%, the Nasdaq up 2.9%, and the small-cap Russell 2000 up 1.6%.
- According to preliminary estimates, the S&P Global U.S. Services PMI fell to a three-month low of 51.7 in March from 52.3 in February, reflecting a loss of momentum in the service sector.
Stocks
- U.S. equities were in positive territory. Communication Services and Industrials were the top performers, while Real Estate and Healthcare lagged. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased nine basis points to 4.22% during the week.
- Global bond markets were in positive territory this week.
- High-yield bonds led for the week, followed by corporate bonds and government bonds.
