Great Quarter (Point), Jay…

Economists may have found Fed Chair Jay Powell’s first press conference today a bit unfulfilling; equity analysts, by contrast, would have felt right at home. His answers felt straight out of a quarterly earnings conference call. Even the sound of the Rolex Submariner on his wrist hitting the desk and reverberating through the microphone sounded like the corporate side of a typical Wall Street investor call.

We’ve heard enough “First calls” with new managements over the years to understand what Chair Powell really wanted to accomplish in his debut performance. His three goals were to:

  • Establish boundaries. Make it clear what sorts of questions will never get a deep-dive response and why that is the case.
  • Explain process. Every Chair or CEO has a particular approach to their jobs, and the first time they speak to a group of analysts or the press they try to outline how they work.
  • Outline notable non-consensus viewpoints. Good speakers know their audience comes into the room with preconceived notions they believe are common wisdom. If the leader in question disagrees with one of these, they want to get that out in the open so no one is surprised later.

Using this framework, here are the important points from today’s press conference:

“We made one decision at this meeting.” That was Powell’s most powerful sentence in the entire press conference, because it checks all the boxes we outlined above. It was in response to a question about how the Federal Reserve will decide between 3 and 4 rate hikes in 2018. He emphasized that committee members’ expectations (as shown in the “Dot Plot”) are simply their own best estimates. Those can and will change with time and new information.

The underlying message was one of process: Chair Powell made it clear that he is intellectually open to new information and will not be anchored by a “Dot”, even if it is his own. Similarly, he doesn’t just look at mean/median economic projections as anything too meaningful, citing the scores of data points the Fed actually analyzes before making policy.

Essentially, Chair Powell looks at the “Dots” in the same way a good CEO thinks about analysts’ earnings estimates: he understands they inform consensus viewpoints, but he isn’t going to spend much time trying to defend them or reject them. On top of that, individual point estimates have even less utility.

When asked several questions about the interplay of inflation, labor market conditions and Fed policy, economists may think he just swatted those away.But listen carefully (we replayed the whole conference again tonight) and what Powell is really doing is explaining his mental framework. The three attributes we heard are:

  • Flexibility on dogma. Chair Powell pointed out that many structural issues in the US economy are simply unobservable in real time. He also accepted the notion that the Fed might let inflation run a little hotter if it was beneficial to labor market growth.
  • Discipline on market communications. When asked if he might do more press conferences in the future, he was careful to say he didn’t want to alter market expectations about future rate moves. Similarly, he rejected the notion of changing the Fed’s balance sheet unwind to accommodate greater Treasury issuance unless economic conditions change materially.
  • Respect for consensus. While Chair Yellen always emphasized group-oriented decision-making, Chair Powell placed even more focus on this point today.

“We don’t do trade policy here at the Fed.” That was another notable line of the presser, in response to the last of several questions about the potential impact of tariff disputes on monetary policy. When pushed about how much the notion of a “Trade war” weighed on Fed policymakers’ minds, Chair Powell maintained it is not a pressing concern. In fact, he said that recent changes in US trade policy had no bearing on the Fed’s opinion of the domestic economy.

“I have no sense we are on the cusp of inflation.” That was the last statement that caught our ear, for it hit on the third of our CEO/Chair first meeting checklist: outline non-consensus views. Given how dramatically bond markets sold off on exactly that fear earlier in the quarter, it was a remarkable statement. Yes, he did note that some parts of the equity market look elevated. But he went out of his way to emphasize that the housing market was not.

In terms of actionable information out of the press conference, we think that last point may be the only one. It implies long-term rates are appropriately set at the moment, something that would be modestly positive for US equity prices going into the end of the quarter.