Powell And Ueda’s Hawks Sure Fly Like Doves
The Federal Reserve and Bank of Japan don’t want to come on too strong, but nor do they wish to be pushed around by ‘bumps’.
(Bloomberg Opinion) --
Today’s Points:
- The Fed could have been more hawkish, just like the BOJ
- The FOMC was un-hawkish enough to bring both the S&P 500 and the gold price to new records
- Dig deeper and the dot plot was more hawkish than the headlines
- AND: Your choice of climate anthems
Going Dotty
Maybe the Federal Reserve and the Bank of Japan have something in common after all. Earlier this week, the BOJ made the epochal decision to scrap negative rates and move slightly into positive territory for the first time in eight years, and abandoned a range of unconventional policies to make money run smoothly. A few weeks ago, moving above zero this early seemed extremely unlikely. But while its direction was hawkish, policy remained very, very lenient and was accompanied by an ambivalent press conference by the governor, Kazuo Ueda. Because the BOJ was so much less hawkish in its communications than it might have been, the historic move was greeted with declines for the yen and Japanese bond yields.
Ueda’s template has been repeated almost exactly by Jerome Powell and his colleagues on the Federal Open Market Committee. A month ago, the market viewed a March rate cut as a racing certainty. It was 100% priced in. Subsequent inflation and unemployment data have been far too strong to permit easing that soon, so all hope of a cut at this week’s meeting had been abandoned. What mattered was guidance for the future. That came crucially from the “dot plot” in which the FOMC members each give their predictions for future rates and economic numbers in the form of a dot. It was the dots, in combination with Powell’s press conference, that allowed the Fed to follow the BOJ strategy of hawkishness so reluctant that people sighed with relief.
The dot plot (which can be found here) has in the past been a great vehicle to signal changes in the Fed’s thinking. This time, the key measure that drove excitement was that the governors’ median estimate for the fed funds rate at the end of this year was unchanged, projecting three cuts. Now, we need to get into the weeds.
I’m continuing my practice of retrograde homemade graphics to analyze the dot plot. Don’t hold any of my brilliant data visualization colleagues responsible for what follows. Using the paint function, I’ve pasted the dots as they stood in the last plot in December on the left, and the latest on the right. I annotated it myself:
You see immediately that nine members are lined up behind three cuts, which is more than three months ago. The median is unchanged. But now, only one governor thinks they’ll cut further than this, down from five, while a second is prepared to predict that there will be only one cut. In total, a net five governors reduced the number of cuts they predicted. That’s halfway to swinging the decision on a committee with 19 members. With nine members expecting two cuts or fewer, only one needs to change from here to raise the median.If we use the mean rather than median, it rose by 11 basis points to 4.81%, which implies that two cuts from here are more likely than one. Further, the mean could have been lower but the median would have risen if only two governors had shifted, but both of them changed from three to two. A lot has been hanging on the abstruse statistical question of how to measure an average.
To add to this, the median did shift for the governors’ prediction for the end of 2025, from 3.6 to 3.9%. This wasn’t a hugely hawkish move by any standard. As expected, the Fed offered a nuanced set of projections that shifted very slightly in a hawkish direction. Just like the BOJ, it could have moved further, but didn’t. And that was great news for risk assets.
Then came the press conference. Powell made no hugely dovish pronouncements (unlike in December, when he was rightly perceived to have pivoted toward lower rates), but resolutely declined to say anything hawkish, either. For analysis, read Lisa Abramowicz’s hugely entertaining Surveillance newsletter. Perhaps most significantly, Powell was asked if he wanted to push back on the easing of broad financial conditions that has come with the stock market rally. He didn’t. For context, this is Bloomberg’s measure of financial conditions, and it’s almost as lenient as in 2021 when fed funds were being held at zero:
Another indicator that the Fed isn’t too bothered was Powell’s lack of concern over the rise in predicted year-end inflation shown by the dot plot. Had he wanted to get a hawkish message across, he could have emphasized this or at least voiced concern, rather than dismiss recent disquietingly high inflation readings as “bumps.” As it was, the market concluded that the Fed didn’t care about inflation — or was perhaps surreptitiously giving up on lowering it to the official target of 2%. This chart, from the FOMC, shows how expectations for the personal consumption expenditures rate of inflation have shifted upward since December:
The dots aren’t a contractual commitment to do anything. Indeed, their track record since the Fed began publishing them 12 years ago has been very poor. For the most painful example, many noted that the median expectation for the neutral or long-term fed funds rate had ticked above 2.5%, for the first time since 2019:
Unfortunately, Fed governors are no better at predicting the future than the rest of us. Let’s take “long term” to mean four years into the future. This is what the FOMC predicted from 2012 to 2020, with the actual fed funds rate from four years later:
At no point has the fed funds rate been where the FOMC predicted. It stayed far lower than expected throughout the post-crisis decade, then exploded higher — though the governors can be forgiven for not predicting the pandemic. And 2.5% was as high as the rate ever reached in the pre-Covid years. It’s unlikely to fall very far in the future, no matter what the FOMC now thinks.
Rather than analyze the predictions, what’s at stake here is the Fed’s reaction function. Taken as a whole, for any given level of inflationary pressure in the data, it looks like the response will be a bit more lenient than previously thought. The recent poor inflation numbers have only nudged the governors a little in the hawkish direction; it will take more of a pickup in prices to jolt enough members away from three cuts this year. If you’re that confident inflation is really coming down, fill your boots with stocks. If you’re not so confident, maybe buy gold.
No News = Good News
Amid all the incoming data of the last few months, the Fed’s messaging has been the same. Rates will only trend downward unless confidence in sustainable disinflation is shaken. It’s hard to detect any ambiguity.
While the not-so-favorable inflation data could easily justify more hawkishness, it turns out that the Fed is unfazed. Bloomberg Economics’ Anna Wong concedes that Powell sounded mildly dovish: “While he omitted one of his signature dovish phrases — that the FOMC could start cutting rates even with inflation still ‘well above’ 2% — he stressed that the committee didn’t take many signals from recent hot CPI reports.”
Its unchanged median projection of cutting 75 basis points this year served up a classic “no news is good news” rally for stocks. The S&P 500 climbed above 5,200, reaching an all-time high yet again. The Nasdaq 100 came within touching distance of its own record. Whether these levels are the new norm is another thing. Here’s Academy Securities’ Peter Tchir: “Maybe I’m being stubborn, but stocks seem to be behaving like ‘stonks’ again, but not sure what pushes them out of what has become a range, while I can still see many things leading to a sharp, rapid pullback.”
Dovish guidance should be good news for the yen. But for a moment, it was not; the Japanese currency tumbled alongside the Bloomberg Dollar Index, threatening the little reprieve the yen got from the BOJ’s reversal of negative interest rates policy. It pared some of the losses after Powell spoke, but is still near record lows.
The Bloomberg World Interest Rate Probability function shows that the chorus for a June cut is catching up once again — rising to 80%. That’s brought bond yields down, although they have remained within their recent range. We’ve been here before. But seeing gold’s price, which has an inverse relationship with interest rates, climb above $2,200 to its highest on record, adds further credence that Powell’s stance is dovish. And as the gold price is up since the BOJ hiked on Tuesday, we can see that traders are unconvinced about Japan:
Does this mean that there’s more to the data than we’ve seen so far? Perhaps not. In Tchir’s view, the Fed’s dovishness could be explained by a worry that if they don’t cut now, they might be behind the curve. He may well be right that their attitude is more about fear than confidence, but the stock market seems to disagree.
A Barbarous Relic
One final point. Richard Nixon ended the Bretton Woods agreement in 1971 and cut the dollar’s the last tie to gold, creating a fascinating indicator. When the ratio of the S&P 500 to the gold price (effectively the amount of gold you’d need to buy the index) has been falling, as in the 1970s and 2000s, it means that the economy is in trouble. When rising gently, it suggests all is well, as in the 1980s and most of the 1990s. And when it goes berserk, as in 2000, stocks may be in an unsustainable bubble.
What’s fascinating is that after all we’ve lived through in the last half-century, the S&P 500 is worth almost exactly as much gold now as in 1971:
The ratio remains below its post-pandemic high. That’s an argument against a bubble; 2024 looks nothing like 2000 here. It also suggests that the market is comfortable with the past decade’s economic expansion, but concerned that it’s been bought with cheap money. Which seems exactly right.
Survival Tips
Bloomberg Opinion is proudly in the playlist business these days. My colleague Lara Williams has written a great piece on potential climate anthems. But she finds none of the possible contenders fit the bill. She says: “Anthems have meme-able lyrics — memorable, easy to chant and catchy — and they’re imbued with hope. Too many songs about global warming are currently laced with anxiety.” That’s true. In response, you could try the Rainbow Warriors album produced for Greenpeace back in 1985. I will always recommend Electricity, OMD’s hymn to solar power released in 1979 that finally went to number one in the UK (in the vinyl chart) in 2019. You might want to add it to Lara’s playlist on Spotify, which you can find here.More From Bloomberg Opinion:
- Justin Fox: Illegal US Border Crossings Aren’t Really Breaking Records
- Shuli Ren: Don’t Ask Cathie Wood About Nvidia, or TSMC
- Lisa Jarvis: Even Oprah Is Struggling to Navigate the Ozempic Era
--With assistance from Richard Abbey.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator at the Financial Times, he is author of “The Fearful Rise of Markets.”
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