What's annoying about this rout in risk assets is that it didn't come as a shock.
Last week, we heard from Waller with a more-hawkish message and then Fed mouthpiece Daly delivered the same message on the weekend.
Between this and Waller, it looks like the Fed is setting up a shift in the dots to 6% or just below. There is certainly plenty of grey area and it's contingent on the data between now and March 22 but it's a fine line. Obviously, the market wasn't spooked by Waller so I don't see that changing on Daly but Powell is speaking on Tuesday and if he strikes some of these notes, the market could take notice.
Well that's exactly what happened.
What's tough about trading is figuring out when the market has already discounted something and when the market is oblivious. This is a case of the latter.
Thing problem is that it's tough to tell. I warned about hawkish risks after Waller but the market went in the other direction. Betting on the market being stupid doesn't work very often but evidently this was one of those cases. I'm slightly sympathetic to Powell signalling 50 bps as incrementally even more hawkish but he really only cracked the door open to it rather than something explicit.
"Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time"
What's tough to reconcile about that comment is the Fed's long history of carefully managing market expectations. The Fed hates to leave markets uncertain heading into a decision, which is why the summer hike was leaked to Nick TImiraos. But by cracking open the door to 50 bps, it adds a good chance of 50 bps.
Put differently:
1) The Fed hates uncertainty
2) The Fed put 50 bps on the table
3) So the comment must mean that 50 bps is coming so long as jobs and inflation are near expectations
That's why you have the market now putting in a 60% chance of 50 bps, which feels about right. But you also can't rule out that Powell was thinking of future meetings and that the comment wasn't meant to signal 50 bps in March. In other words, it was sloppiness.
If that's the case, the Fed will want to clean up the mess, which is something Powell could do tomorrow. However he might not want to walk it back until he sees non-farm payrolls on Friday or maybe not even until after CPI, when the blackout is underway and a leak would be necessary.
Moreover, even if there isn't a leak, the WSJ's Timiraos will need to write an FOMC preview the week of the decision and whatever he writes will look like a leak, introducing even more volatility.
In short, it's a minefield out there. All you can do for the next two weeks is go from headline to headline.
