Credit Bubble Bulletin2020-05-20T17:01:05-06:00

Presented by Doug Noland

Weekly Commentary

December 16, 2022: Credit Downturn Acceleration

Interesting week. The FOMC statement and “dot plot” were viewed as somewhat more hawkish than expected. In his press conference, it was a solid “Balanced Powell” performance.

Powell stuck with his now familiar hawkish points. “We have more work to do.” “Where we’re missing is on the inflation side. And we’re missing by a lot.” “We do see a very, very strong labor market, one where we haven’t seen much softening; where job growth is very high; where wages are very high.” “I would say it’s our judgment today that we’re not at a sufficiently restrictive level yet…”

He has, however, definitely toned it down – now pulling some punches. Questioned about his previous warning of pain from the Fed’s inflation fight, Powell deflected: “So the largest amount of pain would come from a failure to raise rates high enough and from us allowing inflation becoming entrenched in the economy.”

“Balanced Powell:” “We’re restrictive, and I think we’re getting close to the level we think sufficiently restrictive.” But one of the more interesting exchanges was Powell responding to whether the Fed might re-evaluate and adjust its 2% inflation target.

Powell: “Changing our inflation goal is not something we’re thinking about, and it’s something we’re not going to think about… I think this isn’t the time to be thinking about that. I mean, there may be a longer-term project at some point.”

“Longer-term project”? Commentators on Bloomberg were quick to question why the Chair would today even broach the subject of adjusting the target. “Balanced Powell.”

FT headline: “‘Emphasize the Pain’: Jay Powell Keeps Hawkish Tone Even as Inflation Eases.” Most pundits and analysts saw the FOMC and Fed as more hawkish. Curiously, however, two-year Treasury yields declined a couple basis points during Powell’s press conference to end the session slightly lower.

For the week, two-year Treasury yields dropped a notable 17 basis points to a more than two-month low 4.18% (down from Nov. 7 high of 4.72%). Bloomberg: “Bond Traders Dismiss Fed’s Hawkish Tone, Bet on 2023 Rate Cuts.” (more…)

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