The Pivot Is Here - But It May Mean Less Than You Think

investing.com:

We just got our January 2019 moment: the Powell dovish pivot is here.

Contrary to popular belief, a dovish pivot doesn’t mean the Fed is already cutting rates.

Instead, it means the necessary conditions for cutting rates are relaxed, and the monetary policy stance isn’t ‘’we fight inflation’’ anymore but ‘’inflation is going down, hence we cut rates so we don’t remain ultra tight’’.

In Sintra 2017, ECB president Draghi pioneered this approach: as the Eurozone economy was recovering but ECB rates were negative he argued the ECB should start normalizing.

If rates were kept negative while the economy recovered, that was akin to adding more accommodation.

Powell’s dovish pivot relies on the same argument, seen from the opposite side: core inflation is trending around 2.5%, and Fed Funds are still 5.25% — the gap is getting enormous, and hence policy ultra tight.

Cutting rates here just maintains the same level of policy restrictions.

In other words, the Fed doesn’t want real Fed Funds at 3%+ (too restrictive) but at 1-1.5% (mildly tight).

Powell delivered his dovish pivot with 3 punchy headlines.

This is the sentence incarnating a forward-looking Fed, not a reactive one.

The monetary policy stance has changed.

Read: the Fed’s base case is a March cut already.

The important news here is that discussions about the timing of cuts have already started, so the FOMC has rapidly moved from talking about how long to pause to talk about when to cut.

This sentence propelled the probability of a cut in March higher and sent the bond market to the moon.

Powell had all the chances in the world to push back against this huge market rally.

He turned down every chance – even when asked about the nuances of inflation.

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