Fed policy outlook: the markets have boxed Fed Chair Powell into a corner
Fed policy outlook: the markets have boxed Fed Chair Powell into a corner. He will be interviewed Friday at the annual meeting of the American Economic Association, and will be joined by ex-Fed chiefs Yellen and Bernanke. Of course the markets want to hear the Fed will be pausing its tightening posture and may be done with hikes for the year (in contrast to the dots showing 2 increases) due to concerns over signs of slowing growth, weakness in interest sensitive sectors, and tightening financial conditions (worries noted by Dallas Fed's Kaplan earlier). However, analysts suspect he will disappoint the markets and won't say what the markets want to hear. This isn't the venue for such policy comments, especially with the next policy meeting just a few weeks ahead. Look for him to reiterate the Fed is monitoring everything and will act as necessary. Analysts believe he was surprised at how the markets interpreted his December 19 comments on balance sheet normalization, that it is on "auto pilot," and maybe regrets the cavalier tone he took. But until that point, the markets hadn't really shown any worry over how the QE runoff was initially laid out, that the unwind would be on a "gradual and predictable" course. Even Chair Yellen said in her June 14, 2017 presser that it would be "like watching paint dry." Analysts do expect the FOMC to move to the sidelines at the January 28, 29 FOMC, as was the pattern evidenced all of last year. Powell will have the opportunity at that presser to more fully convey his thinking.