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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The only thing Jay Powell could have done to deliver a stronger impression of a festive giveaway to global markets this week would have been to conduct his press conference decked in an oversized red suit with fluffy white trimmings and a matching hat.
The public appearance by the chair of the US Federal Reserve on Wednesday was a big opportunity to use the central banker Jedi mind tricks we all know and love to hint to investors that they have read the situation all wrong.
He has, of course, done this before. Back in October, when real-world borrowing costs were sailing higher with benchmark 10-year Treasury bond yields hovering close to a post-crisis peak of 5 per cent, he said markets were doing some of the Fed’s job for it. As any trained Fed nerd will tell you, that is central banker speak for “yields are too high, knock it off”.
Since then, swept along by continuing signs of weaker inflation and by dovish cooing by other Fed officials, those yields have pulled back hard. Investors had even been anticipating pretty forceful interest rate cuts in 2024 — quite the turnaround from the historic tightening cycle that has now been running for close to two years.
So after leaving rates on hold this time around, Powell was widely expected to give a subtle wink and a nod to markets that “you’re overdoing it, knock it off”. He did not do that at all. Instead, first he took a bit of a victory lap, observing that the recessionistas had got it all wrong. The Fed’s 5.25 percentage points of rate rises had not nuked the economy after all. Then he confirmed that inserting the word “any” into the Fed statement’s discussion of “the extent of any additional policy firming” was a deliberate acknowledgment that rate rises were likely to be over. It pays to watch the details here.
Then, perhaps most strikingly, he noted that some of the Fed’s rate-setters had trimmed their rate forecasts for the coming years in between Tuesday’s data showing that consumer prices had risen in November and Wednesday’s data showing that producer prices had held steady. Scribbling out forecasts and writing in new ones on the day of the rates decision and report is some pretty intense data dependency. The possibility of cuts was coming into view, he said, and was “also a discussion for us at our meeting today”.
Powell has “out-doved” the market. In response, US government bond prices flew higher, while stocks pushed ever closer to a record high. That ripping noise you can hear is not excited children opening their Christmas presents but the sound of thousand year-ahead market forecasts heading towards a bin. We are already within spitting distance of the market’s consensus forecast for where US yields will end next year.
Dan Ivascyn, chief investment officer at Pimco, the world’s largest active bond investment house, suggested that, sure, much could still go wrong, but now might be a time to pat central bankers on the back. “Certain people have been a bit harsh out there in the markets about central banks,” he told the FT before the Fed’s announcement.
“Yeah, they were late [to respond to inflation] but, wow . . . Central banks including the US Fed, in probably one of the environments with one of the highest degrees of difficulty ever . . . they have been able to get us to this point with this level of disinflation and the economy holding up,” he added. “They may go down as one of the most effective central banks when the history books are ultimately written.”
The Fed was not the only game in town this week, however. Outside emerging markets, Switzerland’s central bank also lowered its inflation forecasts, Norway proved to be a fun sponge with a advance quarter-point rise, and the Bank of England opted to keep rates on hold but with a solid three of the nine rate-setters voting for a rise. Meanwhile, the European Central Bank president Christine Lagarde said she and her colleagues “did not converse rate cuts at all”.
At this point, macro hedge fund managers and other investors who seek to harness broad global economic trends are rubbing their hands with joy. Generally speaking, the past two years or so have featured the big central banks all pulling in the same direction. With the exception of the Bank of Japan, each of them has been seeking to damp down inflation with hefty rises in interest rates.
Now they are very clearly at different stages in terms of dialling rates back down, and each is dependent on how economic data releases shape up. Electoral cycles are also not synchronised. With investors unusually closely focused on fiscal policy, that means different major bond markets and currencies are likely to swing around in relation to each other.
“As a macro strategist, this is what I dream about,” said John Butler, head of macro at Wellington Management in London. “This is the best macro environment I’ve experienced in 30 years.”
It could still be the case that the Fed is forced to eat humble pie and jack up rates again next year. Similarly, no one truly knows whether an ugly recession will land. But an obsession over the small print of every senior policymaker’s utterance will be essential throughout next year.
