The Federal Open Market Committee (FOMC) met this past Wednesday, and the subsequent press conference left many people scratching their heads, wondering what did Powell actually say? Having watched the entire thing, I must say he walked the proverbial tightrope quite well. Powell stuck to his talking points, only committed to one thing, and was adamant that the Fed would remain data-dependent. With that said, he sent mixed messages in the things he didn’t say.
Let’s examine what Chair Powell stated clearly. First, the FOMC is squarely focused on its dual mandate of maximum employment and stable prices. Again, there was talk about how weakness in the labor market could be the catalyst for rate cuts, even if inflation remained slightly elevated.
Second, he stated that the committee acknowledged the “lack of further progress” on the pace of disinflation over the last three months. This is, without a doubt, the primary catalyst for the higher-for-longer narrative. However, Powell was confident that housing inflation should start to decline “as long as market rents remain low, this is going to show up in measured inflation.”
Third, and very seriously given the political environment, Powell unequivocally stated that the FOMC would remain apolitical. He said, “It’s hard enough to get the economics right here,” and that they were “always going to do what we think the right thing for the economy is when we come to that consensus view.”
Pressed further on whether there was a difference between cutting in September (pre-election) vs. December (post-election), he made a very forceful reply that shut down the topic. He stated, “There’s a significant difference between an institution that takes into account all sorts of political events and one that doesn’t. That’s where the significant difference is, and we just don’t do that.”
Moving on, let’s look at what Powell didn’t say, which confused many Wall Street firms. There were two main omissions relative to the previous press conferences in response to journalists’ questions. First, Powell would not say we are at “peak rates” for this cycle. He had used that term in previous press conferences, so the deletion clearly indicated the possibility of additional rate hikes.
Furthermore, when asked by a separate reporter if he considered the current rate “sufficiently restrictive,” he would not confirm that. Again, this was noticeable because he had used those exact words in previous press conferences. Both exclusions were “hawkish” developments that seemed like a curveball. To make matters even more murky, he also remarked that it is “unlikely” the next policy move will be a hike.
Ultimately, this illustrates that they genuinely don’t know what their next course of action will be. It actually does depend on the data. And Powell has to navigate that as delicately as possible so as not to disturb markets for no reason. This predicament, understandably, can occasionally lead to vague and somewhat contradictory comments.
Finally, on the data front, two days after the Fed meeting, a set of dovish jobs reports were released. The Nonfarm Payrolls report showed slower job growth (175K vs. 243K expected) and higher unemployment (3.9% vs. 3.8% expected). Moreover, and perhaps more importantly, this combined with a below-expectations report on Average Hourly Earnings (0.2% vs. 0.3% expected). All three of these data points combined to show a labor market that is less “tight” and incrementally less inflationary.
While the newest data does not directly reduce inflation, it is the latest piece of information for the data-dependent Fed, and it is constructive, to say the least.
Economy
- Markets rallied late in the week after the Fed meeting and dovish jobs/payroll data. The S&P 500 was up 0.5%, the Nasdaq was up 1.4%, and the small-cap Russell 2000 was up 1.7%.
- The ADP Employment Change reported private businesses in the U.S. added 192K workers to their payrolls in April, exceeding market expectations of a 175K increase.
- The JOLTs report showed job openings declined by 325K from the previous month to 8.488 million in March, reaching the lowest level since February 2021 and missing the market consensus of 8.690 million.
- The ISM Services PMI in the U.S. dropped sharply to 49.4 in April from 51.4 last month, reflecting the first contraction in services sector activity since December 2022. It was only the second decline in activity since the pandemic-driven crash in 2020.
Stocks
- U.S. equities were in positive territory. Utilities and Real Estate were the top performers, while Energy and Financials lagged. Growth stocks led value stocks, and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 17 basis points to 4.50% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by high-yield bonds and government bonds.
