Wrightson ICAP: Powell Didn’t Pull Any Punches

“Powell didn’t pull any punches in yesterday’s press conference”, writes Wrightson ICAP, as he “repeatedly came back to the fact that the economic outlook today is very different than it was in the last cycle, and the Fed’s policy response would have to be different as well”.

• They note that while Powell “repeatedly passed up opportunities to push back against the idea of tightening more frequently than every other meeting”, he continued to suggest the process would be gradual.
• Wrightson ICAP also saw Powell “playing for time” on QT discussions, announcing a framework in May/Jun, but not pulling the trigger until July. "If the next two CPI reports force the Fed to ramp up its rate hike plans, though, the timetable for portfolio runoffs could be pulled forward as well.”
• Wrightson ICAP's expectations for an announcement of MBS cash flow being reinvested into Treasuries didn’t materialize, and the NY Fed statement suggested that no adjustments will be made before April.
• Re the “principles” for balance sheet reduction, language around achieving “primarily” Treasuries in the “longer run” in the SOMA portfolio, and portfolio reduction “primarily” via passive runoff, could allow “in theory” “for the possibility that the Fed might consider outright sales of MBS later in the process as a way of cleaning up the portfolio”.
• “In the last cycle, the Fed’s various normalization statements explicitly acknowledged that “limited sales” might be appropriate “in the longer run” to dispose of “residual holdings”. Yesterday's statement made no such reference, which may simply be a sign that the FOMC is keeping its options open.”