SSLY - Powell May Hang The Market Out To Dry Come Friday

2023-05-16 13:23:49 ET

Summary

• Jay Powell is scheduled to speak on Friday morning.
• He's likely to enforce his new data-dependent approach.
• Additionally, he's likely to signal no rate cuts in 2023.

Given the narrow trading range observed in the past few days, the markets may overlook this. However, it's worth noting that Jay Powell is scheduled to speak on Friday, May 19, at 11 a.m. This will be Powell's first opportunity to address the public since the May FOMC meeting. While many investors still believe that the May FOMC meeting marked the Fed's final interest rate hike, it's unlikely that Powell will explicitly mention the word "pause."

Considering the significant implications of the CPI report, the notable wage growth indicated in the April job report, and the unexpected rise in consumer inflation expectations according to the University of Michigan, it becomes evident that Powell will remain reliant on incoming data. Additionally, an upcoming April PCE report, along with May's job and inflation data, is scheduled before the next FOMC meeting. Consequently, Powell will probably maintain a data-dependent approach and reinforce the expectation of no rate cuts in 2023 when he speaks.

Despite the market's belief in future rate cuts, as reflected in the Fed Funds Futures projecting a decline from the current effective rate of 5.08% to around 4.5% by December of this year, the recent data does not support such a scenario. Based on the data available up to this point, it is unlikely that rate cuts will materialize in 2023.

Even one of the more dovish members of the Fed, Raphael Bostic, recently noted that they would not be cutting rates well into 2024. While more hawkish members of the Fed, such as Loretta Mester, have indicated they're still open to more rate hikes in the future if needed.

The notion that the Federal Reserve has concluded its rate hikes is another instance of the market attempting to fabricate a familiar narrative about a Fed pause. However, history has repeatedly shown that these predictions of a pause have been inaccurate since the initial speculation emerged last summer. Despite this, the Fed has persistently raised rates.

Granted, it's reasonable to believe that the Fed is much closer to concluding its rate hikes than last summer. Nevertheless, the available data indicate that further action might still be required. At this stage, it's unlikely that Powell will corner himself by calling for a pause in rate hikes. Instead, he will likely wait for more data to reinforce the Fed's commitment to being data-dependent, while the direction of monetary policy is expected to be influenced by the economy's overall health and strength.

Furthermore, while many investors anticipate tighter lending and subsequent tightening of financial conditions, recent weeks have seen a loosening of financial conditions. If conditions continue to ease instead of tightening, as expected, officials may reconsider the ultimate terminal rate for the economy.

While the Federal Reserve is gradually approaching the end of its rate hiking cycle, it's unlikely to be the case right now. It will require additional data to convince the Fed that inflation is under control and declining, consistent with the Fed's 2% target. Moreover, ensuring that inflation expectations remain anchored and not destabilized is crucial. Therefore, more evidence and information will be necessary for the Fed to confidently make decisions regarding the trajectory of interest rates and, more importantly, a lot more time and patience before considering cutting rates as the market expects.

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