Investors expecting a full Fed pivot may be putting the cart before the horse

US Federal Reserve Chair Jerome Powell made investors very happy on Wednesday. US stocks popped after the central banker gave a speech strongly indicating that the Fed would ease the historically-high pace of interest rate rises at its next policy meeting in December, acording to a media report.

But investors who are expecting a full pivot may be putting the cart before the horse, CNN reported.

Powell’s admission that “the path ahead for inflation remains highly uncertain” means that rate hikes could be here for a while.

Investors have been closely watching for any clues that the Fed might slow or pause its painful path of rate hikes, intended to fight persistent inflation. But their search for signs has led to a hopeful distortion of facts: Powell says “moderate” and investors hear “pivot”.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” said Powell in remarks at the Brookings Institution, his last public appearance before the central bank enters a blackout period ahead of its December 13-14 policymaking meeting.

Investors celebrated. The S&P 500 ended its three-day losing streak and closed up 2.7 per cent on Wednesday. The Dow officially entered a bull market. The 10-year Treasury yield also eased on the news.

Market rallies can lead to counterproductive easing in financial conditions and boost the economy, which is the opposite of what the Fed is trying to do with its tightening policy. Powell tried to do some hawkish ‘jawboning’ by signaling that the FOMC will keep hiking well into 2023, but investors didn’t seem to mind, CNN reported.

“By any standard, inflation remains much too high,” said Powell, adding: “It will take substantially more evidence to give comfort that inflation is actually declining.”

Investors are seemingly addicted to the highs and lows of any perceived shifts in the Fed’s thinking, leaving markets excessively volatile. That’s exactly what the Fed doesn’t want to happen.

St. Louis Federal Reserve President James Bullard warned earlier this week that the stock market is underpricing the risk of a continually aggressive Fed.

This isn’t the first time investors rushed into markets on the belief that there would be a Fed pivot. The last time the market ran with a similar narrative over the summer, it didn’t go so well. Powell responded with a very hawkish speech at Jackson Hole that sent markets plummeting. The Fed ended up delivering more hikes in the months that followed, CNN reported.




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