- Federal Reserve Chairman Jerome Powell’s speech on Wednesday wasn’t as dovish as the stock market believed.
- That was evidenced by the bond market barely reacting.
- Nothing has changed.
So on October 3, the Federal Reserve chairman said we were “a long way from neutral.”
And indeed we are.
On Wednesday, the junky monkeys who populate the stock market thought they heard something different. They thought that he turned dovish and that his tone changed. Well, they are wrong. And while the Dow and the S&P 500 did indeed enjoy their second-best session of the year, if the Fed truly has turned to a more dovish stance, wouldn’t that be reflected in the one security that is the most sensitive to shifts in monetary policy? I’m talking about the two-year T-note yield, of course, which fell the grand total of 2 basis points yesterday to 2.8%. Big deal. Yields out the Treasury curve barely reacted at all. As usual, the “bondies” have the story right. The equity market does not, but who ever said that it doesn’t respond to hope every now and again?
He didn’t say the Fed is close to neutral. He was more specific — he actually said, for the record, that “interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.”
This time around, he didn’t say rates were well below neutral; he said rates were slightly below the low end of the range of estimates. That range is estimated to be between 2.5% and 3.5% — so at a 2% to 2.25% band right now, rates are between 25 and 50 basis points below that low end. And rates are still about 75 or 100 basis points shy of the midpoint, which is what Powell was referring to back on October 3.
So you see, nothing has really changed.