“It Makes Sense To Slow Down” – Wall Street Reacts To The Fed’s Unexpected “Soft Pivot”
“It Makes Sense To Slow Down” – Wall Street Reacts To The Fed’s Unexpected “Soft Pivot”
While the range of outcomes and market reactions to today’s FOMC statement ran the gamut from +10% to -8% (according to JPM), the prevailing consensus was more “autopilot” from the Fed, and any potential dovishness would come in Powell’s presser, certainly not codified in the actual statement. However, as noted earlier, it was with Powell explicitly adding language warning about the “cumulative” effect of monetary policy , which works with a “lag.” The immediate impact was to send futures surging, and the dollar and yields tumbling.
Below we have compiled several reactions from Wall Street strategists and traders, sharing their post-FOMC take.
Ian Lyngen at BMO Capital Markets:
“‘Cumulative tightening’ and ‘lagged impact’ suggest that this will be the last 75 bp hike and in December the move will most likely be 50 bp. We’re somewhat surprised to see the ‘soft pivot’ in the statement itself and we expect that Powell will double down on this narrative at the press conference. Therefore, the bullish move has more room to run.”
Eric Winograd, AllianceBernstein“The statement is clear that they would like to slow the pace of hikes . In addition to looking at the data and looking at markets, they are also now considering the cumulative impact of what they have already done. And the lag with with that will hit the economy. Most estimates are that it takes 9-12 months for rate hikes to be felt, and 12-18 months for the maximum effect. We are only just now eight months past the first rate hike , so it makes sense to slow down. I would think rates down, curve steeper, stocks up, based on the statement.”
Peter Boockvar, CIO at Bleakley Advisory Group: “The front loading is essentially over and rate hikes from here will be more cognizant of the new economic environment we’re in with respect to the much higher cost of capital and economic clouds that are circling. This is the Fed’s way of telling us that a slowdown in the pace of future hikes is upon us.”
Ira Jersey, Bloomberg Intelligence”It makes sense for the Federal Reserve to get back to increasing rates in only 25-bp increments by February, regardless of where the terminal rate ends up. Having the ability to calibrate monetary policy is easier than if it’s moving in larger increments. Fed funds futures, however, took the statement as very slightly dovish.”
“Some may view a Fed pause as leading to the risk of inflation remaining elevated, however we think eventually the market adjusts its thinking toward a deeper economic slowdown in 2024, and price for no cuts in 2023, but deeper cuts thereafter.”
Peter Tchir, Academy SecuritiesCumulative and Lag – they inserted language that they will take that into consideration – keeping my bet that we come out of this with smaller / fewer / more spaced apart rate hikes priced in – given that insertion and no dots to lean on, seems good bet that Powell will be equivocal, which is enough…but will find out when presser starts
Neil Dutta, Renaissance Capital”Lael Brainard’s fingerprint are all over this. It will take time for the cumulative effect of tighter monetary policy to work through the economy broadly and to bring inflation down.”
Mohamed El-Erian, Allianz”As widely expected, the Fed hiked interest rates by 75 basis points. As to what’s next: I suspect the entire focus will be on interpreting the additional language in the statement. Markets are not waiting for the press conference to interpret this as dovish. Will be fascinating.”
Omair Sharif, Inflation Insights:”This statement is a nice compromise between the folks who think the terminal rate is higher and those, like Daly, George, Evans, and Brainard who think that the pace of hikes should moderate given the lags in policy . Frankly, I’m not sure this means that 50bps is the base case for December, and I’d be surprised if Chair Powell were to lean in that direction at the press conference. Instead, this says that the terminal rate could be higher (‘attain a stance of monetary policy that is sufficiently restrictive’) but the pace at which they get to their destination could slow (‘take into account cumulative tightening’) as they get closer to that level. That said, the pace still very much depends on where that terminal rate is, and that could change in the December SEP depending on the data….Depending on how the inflation/unemployment data come out between now and December 14, you could potentially see that move up again, and in that case, you’d likely need to continue with 75bps in December, i.e. the data would warrant it.”
Diane Swonk, KPMG
“There’s a] growing minority within the Fed who are really looking at how they need to think about rate hikes , now that we’re in tight territory.”
Tyler Durden
Wed, 11/02/2022 – 14:36
Peter Boockvar, CIO at Bleakley Advisory Group:
“The front loading is essentially over and rate hikes from here will be more cognizant of the new economic environment we’re in with respect to the much higher cost of capital and economic clouds that are circling.
Omair Sharif, Inflation Insights:
“This statement is a nice compromise between the folks who think the terminal rate is higher and those, like Daly, George, Evans, and Brainard who think that the pace of hikes should moderate given the lags in policy. , you could potentially see that move up again, and in that case, you’d likely need to continue with 75bps in December, i.e. the data would warrant it.”
Diane Swonk, KPMG
“There’s a] growing minority within the Fed who are really looking at how they need to think about rate hikes, now that we’re in tight territory.”
Tyler Durden
Wed, 11/02/2022 – 14:36
