Markets Look Through Powell's Rate Cut Pushback

Chair Powell's speech today didn't contain much new information, predictably following suit with NY Fed's Williams' and SF Fed's Daly's commentary Thursday pushing back somewhat against the rate-cut frenzy generated by Gov Waller's commentary Tuesday about how rates could be cut if disinflation inflation continues over the next few months.

• He noted that it's premature to speculate on rate cuts, but his nod to policy being in "well into restrictive territory" was taken by markets as a dovish cue.
• We would note that he's said similar before, and even this week, dove Williams noted that "if price pressures and imbalances persist more than I expect, additional policy firming may be needed" despite the fact that policy is "estimated to be the most restrictive in 25 years". In other words, they will know when it's restrictive enough when they see it in the data, and not before.
• The main takeaway for the December FOMC meeting from this speech, which largely runs through his November press conference messages (with an update on the PCE inflation numbers), is that the Fed's forward rate guidance ("in determining the extent of additional policy firming that may be appropriate") was repeated by Powell today and is unlikely to be substantially changed in the upcoming Statement.
• On the eve of the blackout period the main question remains how the FOMC will frame the idea that rates can remain restrictive in real terms even while rates are being cut as long as inflation is diminishing. That's what Waller was pointing out on Tuesday, and is very similar to what Powell's said before.
• It's not clear that the 125bp of cutting now implied by markets is what Powell and the FOMC have in mind, though. We haven't seen any formal analyst expectations yet but we would venture that the Dot Plot is likely to show at least one rate cut from current levels alongside progress in inflation.
• It's highly unlikely the median Dot will endorse the current market pricing, let alone a cutting cycle beginning in Mach (now around 70% implied). To what degree that is considered hawkish vs pricing could depend on how much Powell emphasizes the disconnect in the press conference.