Why Jay Powell Doing One Thing and Saying Another Is a Problem

On Wednesday afternoon, after concluding the scheduled meeting of the FOMC, the Fed released a statement that surprised hardly anyone. The pause in the rate hike cycle this month was widely anticipated, so most people were focused on the language in the accompanying statement. That too, however, was largely unsurprising, at least to those who have paid attention to Jay Powell’s tactics. He has fallen into the habit of doing one thing while saying another. That, however, is creating a bit of a credibility problem.

Last month, when there was some pressure not to raise rates, the Fed did so, but the 25 basis point hike came with a statement that said they were considering a pause before too long. Then, on Wednesday, they did the opposite, not hiking, but saying that didn’t mean that they wouldn’t hike again soon, and that they certainly weren’t entertaining the idea of a cut. That has led to a situation that famed bond investor and frequent Fed critic Jeffrey Gundlach to say in a CNBC interview that we saw a dovish hike followed by a hawkish pause.

It is easy to see why Powell might do that. Presumably he believes that signaling everything ahead of time then saying one thing while doing the opposite will mute the market’s reaction to policy decisions. So far, that seems to be the case. The S&P 500 dipped in the immediate aftermath of the hawkish statement, but then recovered and resumed the upward trend that has been in place for the last three months. However, the rally has been based on a belief that one of two things will happen: either this will turn out to be not a pause, but a peak, an end to rate hikes for a while, and/or rates will be cut before the year is out.

The fact that stocks have resumed their upward trend therefore tells us that traders and institutional investors heard Powell, but basically don’t believe him. That is hardly surprising. If there is no reason to think that rates are high enough or that some damage could be done to the economy at even this level, then why pause? In the short term, the assumption that what the Fed Chair says is irrelevant doesn’t matter because it is nothing new. Traders are inclined to pay more attention to what people do than what they say, whether that person is a politician, CEO, or a central banker. Positioning based on what is, not what someone said might be, is perfectly normal. Over time, though, it could easily become an issue.

If a CEO attempts to mislead the market on a regular basis, then the market simply will filter out everything that CEO says. The same goes for politicians; more than ever, people are (or perhaps ought to be) taking everything they say with a massive grain of salt and instead focusing on their actual votes and policies. However, a Fed Chair’s words traditionally have a lot of power and are often used to guide markets to a desired place. If traders are conditioned not to believe those words, then the Chair loses a valuable tool in their attempt to fulfill their dual mandate of price stability and full employment.

It is incumbent on a Chair of the Federal Reserve Bank to be brutally honest and to speak truth to power. Jay Powell, however, is risking putting himself in a position where should he attempt to do that, it will be seen as just another example of words with an ulterior purpose, and not the truth. That is a dangerous place for a Fed Chair to be.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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