Central bank governors and OPEC chiefs have the same predicament – how to put out their message or narrative out without giving too much way and yet try to steer markets in the direction they want without spooking traders. If the new US. Federal Reserve Chairman Jerome Powell wanted the markets to take his maiden Semi-Annual testimony before the House Financial Services Committee yesterday as a first foray towards four rate hikes this year, he got what he was looking for, and then some. More specifically, Chairman Powell's "personal outlook" reply to the question about the March quarterly Summary of Economic Projections – a listing of a virtual cocktail recipe for an overheating economy -- sounded so jarringly bullish, if not outright hawkish that it leapt out from the otherwise more balanced remarks in the rest of the Q&A and the written testimony.
At minimum, it felt like a first small step towards a four hike path, and whether intended or not, Chairman Powell in that one response put a four hike market pricing just one or two stronger than expected data points away. The markets reacted by selling stocks and it took Powell the next day to resort to yet a more nuanced clarification to stave another sell off. Allaying fears that could have led to a new global banking contagion, according to Powell, the US banking system was "healthy", and that banks “ are better able to manage risk and failure. It's a good time in our system," he told the Senate Banking Committee. He also calmed fears that the pace of interest rate rises would accelerate. “There is no evidence the economy is overheating," Powell said. Although the current 4.1% unemployment rate was "at or near or even below" estimates of the full employment rate, "we don't see any evidence of a decisive move up in wages... Nothing in that suggests to me that wage inflation is at a point of acceleration." And so there it was – these new narratives saw Wall Street's main indexes overturn earlier losses to trade higher and eased some of the fears of faster interest rate hikes stoked by Powell's comments earlier this week about a strengthening US economy in his first appearance in Congress on Tuesday.
Market analysts will be somewhat cautious that the Fed will be moving too soon to a four rate hike scenario, preferring to see how inflation, and perhaps an early indication of investment spending look to be playing out this spring before signalling a fourth rate hike. That would put any upgrade in the pace of hikes this year more likely still into the June meeting. While the markets after an initial shock sell-off seem to have taken it in stride, we suspect a rates messaging that feels pre-emptive could nevertheless strain the Fed's ability to control its gradualist messaging if his remark is left alone The market, for instance, could go on alert for an even more hawkish Fed, pricing beyond four on every data point that comes in a bit stronger than expected in the months ahead. That could especially prove to be the case if the inflation prints show, as expected, an uptick this spring when last year's "transitory" downward pressures drop out of the year-on-year data.
The main question for those waiting to see when to borrow is that despite all the upbeat data that we see coming out of the US, the main concern is going to be the pace of these rate hikes and how quickly is it going to happen.Dr. Mohamed A. Ramady