Clarida, Brainard Provide Dovish Blueprint For Powell Today (2/2)

Talk of Powell mentioning potential for an 'operation twist' / expanding asset purchases today is quite...speculative. Financial conditions remain very much accommodative so there isn't much urgency to engage in verbal intervention and backpedal on recent communications ahead of the March FOMC. But there are other options if Powell wants to talk down yields beyond what he said last week, each of which would dampen tightening speculation without floating a specific policy action. Such as:

• Powell could echo Vice Chair Clarida's remarks last weekand say specifically that his outlook implies that policy will remain unchanged until at least the end of 2021. This could push back against expectations of a taper by year-end (which is expected by some).
• It could also help relieve pressure on rate hike pricing: we have not just seen a long-end sell-off but also a forward repricing of rate hikes with ~2 quarter-pt hikes now expected by end-2023. That will be foremost in the FOMC leadership's mind in terms of talking down tightening expectations, esp since the funds rate remains the main policy tool and pricing is now out of line with the FOMC dots.
• Powell could reiterate that the Fed stands to do more if needed, which wouldn't be "new" language but would remind that the next move could be to ease and not tighten.
• In line with that, Gov Brainard provided another dovish option, to say that the recent moves in yields had caught the Fed's eye, and emphasize that they were looking for any signs that such moves "could slow progress" on economic goals via tighter financial conditions. This would fall short of talking specific policy options but convey that the Fed is taking the yield move seriously.