Jay Powell: Still an Investment Banker at Heart

Every highly experienced Wall Street professional has, tucked away in their back pocket, something called a “Deliver the firm” speech. It is a standard feature of any business pitch in finance, usually presented by the most senior person on the team at the start or end of a long form presentation with multiple participants.

Its purpose is simple: to give the other side of the table confidence that the speaker’s entire institution will move heaven and earth to make the transaction or relationship under discussion work as well as possible. I have heard dozens of such talks over my career from CEOs of brokerage firms, heads of equity departments, and lead bankers. All use essentially the same words; the delivery is everything.

At their best, “Deliver the firm” talks are not empty-headed sales pitches.Rather, they leave the listener with the idea that the firm pitching for business has a well-oiled machine in place to deliver on its promises. It doesn’t matter if “Delivering the firm” means seeing an investment banking deal through to conclusion or convincing a company you are their best partner for a private equity transaction. The message – “We have the experience and processes to be a productive partner” – is what matters.

Fed Chair Jay Powell gave a “Deliver the firm” performance in his inaugural testimony to Congress – forthright, candid and very processes-driven. As I watched, I had several vivid flashbacks to pitches earlier in my career. Given Chair Powell’s experience in investment banking (Dillon Read, 1984 – 1990) and private equity (Carlyle, 1997 – 2005), I suppose that’s to be expected. Still, it was a dramatic shift from the professorial style of former Chairs Bernanke and Yellen.

The results of this candor are easiest to see in the response from the Fed Funds Futures market much more than the 10-year US Treasury, which did not break out to a new high in yield today or even US stocks, which really just gave back yesterday’s gains. Specifically:

• The odds of 4 or more rate hikes in 2018 are now at 34% according to December Fed Funds Futures, up from 27% at yesterday’s close. By our reckoning that is a new high for this market-based estimate, indicating that Powell’s testimony had real impact.

• While the odds of 5 or even 6 rate hikes of 25 basis points in 2018 is small, at 7.6%, futures markets now believe that is a more likely outcome than zero or one rate increase this year. Odds of either of those scenarios are down to 5.3%. Again, the first time the upper end of the distribution weighs more heavily than the lower end.

• While Fed Funds Futures markets get less liquid the further in the future you look, it is also worth noting that March 2019 contracts now fully price in 3 rate hikes of 25 bp between now and then. Just yesterday, they were 50/50 on 2 versus 3 hikes.

Now, part of the “Deliver the firm” talk is to be clear about what you can and cannot do for your prospective business partner, and we suspect that Chair Powell’s bluntness may have come as a bit of a shock. He views capital markets volatility as normal; if there is a “Powell Put” it is somewhere over the horizon. He sees the Fed’s inflation mandate clearly; a combination of tax cuts and fiscal stimulus this late in a cycle are cause enough to entertain incremental rate hikes. The Fed has a clear mandate from Congress; anything outside that is someone else’s problem.

Can US stocks rally from here with such a different communication strategy from the Federal Reserve? We believe they can and will. Corporate earnings are strong and financial reporting season is a month away. Interest rates and volatility are both rising, so the path higher will not be as easy as last year. Equity markets will readjust to those realities.

If we have one concern from a trading standpoint, it is that we don’t know what Chair Powell knew about upcoming economic data releases when he spoke today. Sometimes when policymakers “Surprise” markets, it is because they have an information edge. Given Chair Powell’s professional experience, I would be disappointed if he didn’t.

We will know soon enough.