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Powell Sets Up Debate Over Lags, Yield Impact At Nov FOMC (1/2)


In line with MNI's expectations, Powell yesterday echoed FOMC colleagues in implying that a rate hold was forthcoming in November, in part due to higher market yields doing some of the Committee's tightening job for them but more broadly as part of a "careful" data-dependent approach. He also, as expected, kept the door open to a December hike. In line with market reaction, the prepared text struck us as dovish, with the Q&A was more hawkish in tone.

  • First with the dovish material - Powell began his opening text by taking the dovish take on recent data, saying it showed "ongoing progress toward both of our dual mandate goals". While somewhat oddly he didn't mention the expected decline in shelter inflation, he importantly noted that "indicators of wage growth show a gradual decline toward levels that would be consistent with 2 percent inflation over time".
  • He also said that the FOMC remained "attentive" to the rise in Treasury yields as it "can have implications for the path of monetary policy" - i.e. less hiking would be required, all else equal. He noted it was largely non-Fed funds hike related factors doing the recent lifting, which sounded somewhat like Gov Waller's analogy to the tightening of conditions earlier this year on the back of bank failures, which allowed them to skip a hike.
  • As such Powell said in the Q&A that "at the margin" higher yields could mean fewer rate hikes are required. (That was a little less forceful than other FOMC members more clearly pointing to higher yields translating into fewer hikes.)
  • Powell also said of higher yields “it doesn’t seem to be principally about expectations about us doing’s clearly a tightening in financial conditions and we will be watching it carefully.” Minneapolis Fed Pres Kashkari, for one, this month noted the difference between higher yields as a result of exogenous factors, and those due to expectations of Fed hiking - if it's due to the former, it may mean less hikes are needed, but if it's the latter, it means the Fed may have to follow through on those expectations.
  • As per previous appearances, Powell dismissed any specific estimate of policy lags, but noted that “given the fast pace of the tightening, there may still be meaningful tightening in the pipeline,”
  • Where the tone changed in a hawkish direction was in discussing the current stance of policy - Powell said: "Does it feel like policy is too tight right now? I would have to say, 'no'. I think the evidence is not that policy is too tight right now." It was as much about the emphatic way that Powell said this as about the words themselves. He also maintained that the main risk was high inflation.
  • Overall though, compare the words and tone of this appearance with a hypothetical one in which Powell thought financial conditions were too loose for the FOMC's comfort - clearly that wasn't the case here. The Oct 31-Nov 1 FOMC deliberation is shaping up to be one over the lagged impact of tightening and the impact of higher yields, with any differences between Thursday's appearance and the Nov 1 press conference key to watch.

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