Goldilocks Plays Hamlet

I’m sure that some of you have tired of my repeated description of Fed Chair Powell as “Goldilocks in a Suit.”  For better or worse, I still believe the moniker applies.  It is not intended as an insult by any means, and instead it refers to Powell’s propensity to speak in less than absolute terms.  No one wants to box themselves into an untenable position – including market strategists who write daily columns – so it is quite understandable that the person at the helm of a key central bank would assiduously avoid doing just that.  That said, in the immediate aftermath of his press conference, it occurred to me that a different fictional character better described the Chair’s performance:

“He was Hamlet,” Sosnick said. ”‘Maybe we’ll raise rates in September, maybe we won’t. Maybe we’ll pause, maybe we won’t.’ … I understand what he was doing. He did not want to take away any tools from the set that’s at his disposal.”

“But he was trying so hard to be two-sided that I think there wasn’t really a clear message,” Sosnick said.

In our piece yesterday, we flagged the likelihood that this could indeed be the situation:

It thus seems unreasonable to expect the FOMC to declare victory today.  They can certainly recognize the improving inflation picture that we all see, but it also seems unlikely that they would do anything to offer any room for markets to reignite inflationary expectations.  The best way for them to achieve that would be to reassert their vigilance against inflation by continuing to offer rhetoric that skews toward higher rates and tight monetary policies.  Stock traders would relish softening rhetoric, but it is not clear that the FOMC statement will offer anything beyond an acknowledgement that inflationary pressures are abating.

But that could change once the Chair starts his press conference.  We’ve seen Powell soften his message when questioned by reporters – either by leaving himself some wiggle room or by choosing to avoid outright confrontation – and we’ve also seen traders seize upon even the slightest nuance that can be interpreted in a bullish light. 

The FOMC statement itself seemed to go out of its way to say nothing new.  Moderate growth, low unemployment; “elevated” inflation; we’ll monitor the situation and adjust accordingly if risks emerge (aka we’re data dependent).  Thus, it was up to the Chairman to offer further insight to eager traders. 

But Powell didn’t really do that.  He tried to be very clear that the prospect of further rate hikes as soon as next month could not be discounted.  This fits with the notion that inflation, while improving, remains above the Fed’s 2% target.  As such, the central bank wants to be very careful about doing anything that might stoke inflationary expectations, and a shift away from tightening rhetoric would do that.

That said, further hikes are hardly a done deal, and when Powell correctly acknowledged that possibility, traders as usual seized upon those comments.  When he said that the Fed may or may not raise rates further, equity markets rallied on the “might not” part.  There was little follow-through, however, so markets meandered lower, then back to roughly unchanged by the close.

One of the few unequivocal comments was that the Fed would not be cutting rates by year end.  Fed Funds traders seemed to get that message.  As of noon on Thursday, we see no probability for cuts by year-end.  We also see a 23% chance for a hike in September and a  42% chance for a hike in November, meaning that at least some traders have considered, “to raise, or not to raise – that is the question.”