Between the Lines: The Shockingly Dovish News Hidden In Powell’s December FOMC Speech

Behind the facade of Powell's carefully curated December FOMC speech was a shockingly dovish comment that will shape the 2023 stock market.

Justin Nugent

This article was last updated on 12/14/2022.

Powell Plummet

When Powell came out to give his December FOMC speech, he did his best to stick to the book. Despite the 2:30PM EST selloff, Powell was actually reading the 2PM statement line for line. Powell gave intentionally ambiguous answers to questions about recession, the job market, stagflation, China-reopening, and more — telling market participants, 

“No one knows whether we’ll enter a recession. It’s unknowable.” 

Pressed once more on the “size of recession that the Fed would accept,” Powell essentially said the Fed hadn’t thought about it at all. That’s probably a lie — but it was the right thing to say at the time. 

Asked whether China’s reopening would have a negative impact on the fight against inflation or a negative impact on economic growth, Powell said,

“China reopening shouldn’t impact us materially.”

Yet another way for Powell to tell market participants, “Shhhhhh.”

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While Powell did express that the November CPI was a step in the right direction, Powell continued to use familiar phrases, including sprinkling in yet another homage to Paul Volcker when he said,

“We at the Fed will keep at it. […] We will stay the course until the job is done.”

As we have identified in the past, “Keep At It” is a reference to the title of a book about famous Fed hawk Paul Volcker — another counterbalance to keep the market from getting too excited about its second inflation-win in a row.

However, Powell didn’t give any clues about February, instead giving the market another intentionally vague answer. The reason, once again, to keep the Fed-frontrunning to a minimum.

Even when asked whether the Fed had considered whether it would alter its mission of getting inflation down to 2%, Powell neither confirmed nor denied the question, instead reiterating that it was the Fed’s goal to see inflation “moving towards 2%.”

However, in between repeat references to his “tools” and a tactful walk across the policy tightrope, Powell gave the market one golden nugget. A dovish little easter egg for anyone capable of reading between the lines. 

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Jerome Powell Inadvertently Tells the Market That the Fed is Almost Certain to Cut Rates in 2023

That shockingly dovish comment came near the end of the speech, when Powell was asked whether (and when) the Fed would consider cutting rates. The answer may not have shocked Wharton professor Jeremy Siegel, or the analysts at Bank of America, but for those who think that the Fed will stay hawkish throughout 2023, listen up.

When asked whether the Fed would consider cutting rates, Powell said something that was meant to seem ambiguous

The Fed won’t consider cutting rates until it’s confident that inflation is moving towards 2%.

Let’s unpack that statement — because this is the one and only instance where Fed Chair Jerome Powell breaks from the ranks of, “We will keep at it”, “We will stay the course until the job is done.” Type language.

Instead, Powell lets the big secret slip:

Not only will the Fed absolutely cut rates, it doesn’t even need to see inflation return to 2% in order to do it. The Fed just wants to be “confident that inflation is moving towards 2%.”

If you listen to a growing pool of economists, analysts, and hedge fund managers, that’s going to happen sooner than you think. And while a mild Fed-induced recession is part of Jeremy Siegel and Bank of America’s base case, there’s a new, more compelling hypothesis emerging:

Low year-over-year inflation data will soon fall off of the CPI calculation.

What does that mean? We’re glad you asked. When Powell says, “2%”, he’s referring to the year-over-year inflation data. Year-over-year data is calculated in the exact way that it sounds — it’s measured against the data from 12 months prior. It’s easy to see sky-high numbers when the comparative trough of the graph looks like it did a few months ago:

Source: CPI YoY data points

We’ll say it again: When you’re comparing a month of economic reopening and supply-chain pressures to a period of diminished economic activity, it’s easy to get an abnormally high inflation reading. However, when the script is flipped, and you’re now comparing a period of slow economic growth (induced mostly by Fed rate hikes and quantitative tightening) to the 40-year height of inflation, the opposite is true:

It doesn’t take a significant recession to dissolve high YoY CPI readings. It just takes a strong backdrop comparison.

Imagine it a different way. You’ve lived in Arizona all your life. The climate is hot, but you’re used to it. Sweltering temperatures and above-100° readings on your thermostat are nothing new to you. Now you’re moving. Your new climate: Maine, where the average annual temperature is 39°. In the Spring, you watch the locals exit their homes in tank tops and shorts, and you cringe. To you, it’s freezing. You’re used to Arizona. You’re used to very hot weather. That’s your backdrop comparison. Your point of reference.

Now, let’s imagine you were born in Antarctica. Impractical, we know, but it’s for the sake of comparison. Same game — “What’s a tank top?” — In this example, you’re used to sub-zero readings on your thermostat. You move next-door to our Arizona native, in the state of Maine. To you, it’s hot. This may as well be a tropical island. It isn’t about whether Maine was ever extremely cold or extremely hot — it was always about your point of reference. It was about the past that you came from. The prior experience with which you compared your current experience.

If you can imagine, reading the YoY CPI print is the same game. It isn’t about whether prices are high or not. It’s about what you’re comparing those prices to. Everything in life is relative — especially a year-over-year comparison.

So, when you hear the economists predicting that inflation could reach 2% by mid-year 2023, it isn’t just wishful thinking. It’s a tactful analysis on the impact a slowing economy, lagging rate hikes, recessionary fears, and a 40-year-high relative comparison (mid-year was the inflationary high of 2022).

The bottom line: Powell saying that Fed will consider cutting rates when the Fed is confident that inflation is “moving towards 2%” is like saying, “Forget everything I said about staying the course. Forget about ‘higher for longer.’ We’re turning the money printer back on sooner than you think.”

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