27Jul12:00 pmEST

More Pain Needed Before A Fed Pivot

I must stay that it seems a bit odd to find myself in the position of sticking up for Jay Powell's intestinal fortitude, given his penchant over the years as Fed Chair for acquiescing to markets just when it looked like he was sticking to his guns of (relatively) hard monetary policy. 

However, the plethora of calls I continue to see for an imminent Fed pivot to a dovish stance seems patently absurd. Currently, the Federal Funds Rate sits at 1.58% and will likely be at 2.25% or higher by day's end with the FOMC at 2pm EST. However, as you know, the latest CPI print was 9.1% and even that number is still likely low-balling the actual inflation rate at your local grocery store, for example. Furthermore, rates on the 10-Year Note are now back below 3%.

None of this amounts to a situation in any sane world where The Fed should be backing off its tightening cycle. Even if we are in a recession currently, the jobs market is far from weak and it is not yet consistent with a deep, deflationary recession to the point where a pivot would even be close to appropriate. 

The main scenario where a pivot could, conceivably, happen anytime soon would be about a month from now in Jackson Hole. But only then that would likely occur if markets were much, much lower than they currently are, with the S&P 500 right around 4,000. In fact, I would surmise that the S&P would need to be below 3,000 by next month or the September FOMC for a pivot to be on the table. 

Until then, expect Powell stay the course.

Furthermore as Bill Ackman astutely noted, Powell actually needs to become more hawkish in his tone and tenor--He has almost been apologetic in his remarks so far, trying to massage the rate hikes in a soothing way for markets ("Hey, we will raise by 50 bps, and we didn't even consider 75 bps!" such as earlier this year). While this may feel like a short-term win for Powell as markets took it all mostly in stride, it actually makes his job tougher long-term as markets still expect The Fed to begin cutting rates in 2023. This undermines The Fed's goal of crushing inflation, and Powell is going to need to talk tougher. 

With the rally in equities and risk since June, he now has ample cover to toughen up and surprise markets at this FOMC, leaving himself room to wiggle out of it at Jackson Hole next month if things really go haywire. 

Will he take the easy way out again, winning the battle but ultimately prolonging a losing battle against inflation, or will Powell disappoint all of the "pivot" doves who just want to revive the glory days of the QE/ZIRP bull market? 

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