Fed Chairman Powell and investors disagree on the US economy

Federal Reserve Board Chairman Jerome Powell delivers remarks at a news conference following the Federal Open Market Committee meeting on May 3, 2023 in Washington, DC. Anna Moneymaker—Getty Images

Within hours of the Federal Reserve’s latest policy decision, traders and commentators began challenging Chairman Jerome Powell. Assessment economy.

The bond market Powell waved off the possibility that he may have one more hike up his sleeve, suggesting that the U.S. Federal Reserve’s next move would instead be to cut its key interest rate. The decline in crude oil prices points to growing concerns about a recession that could be avoided, the central bank chief said. And Financial stocks Even after Powell saw a line drawn under the US banking crisis, the new fell.

DoubleLine Capital’s Jeffrey Gundlach told CNBC that the likelihood of a recession is high and that the Fed will not raise interest rates again following its recent hike. Meanwhile, at the Milken Institute Global Conference, talk among panelists suggested a consensus that contraction was inevitable.

WTI crude fell 4.3% on Wednesday, reflecting concerns about weak economic growth in major economies. It fell to 7.2% Confused The market will open Thursday before recovering.

„Our view is a technical recession is a question of if and when,” said Lindsey Rosner, multi-sector portfolio manager at PGIM Fixed Income. „If Powell had just laid out the framework they’re operating in, it’s not a recession, it’s one of moderate growth, suggesting they change course if they see a slowdown.” That’s why we believe they should make the cut.

To be fair to Powell, he pointed to Wednesday’s interest rate hike, which took the benchmark rate above 5%, as likely the last in a cycle that has pushed borrowing costs up from near zero last year. Although the central bank chief said this week there was strong support for raising rates by 25 basis points, he suggested that officials may pause their tightening campaign in June.

Powell also acknowledged that bank lending has slowed. And while U.S. economic data points to a slowdown in the labor market, it doesn’t yet signal that a recession is at hand.

Quick response

But news moves fast and traders can’t wait to see how things pan out.

Treasuries rose on Wednesday as investors bet that the Fed will keep interest rates low before the end of the year, despite Powell’s insistence that the Fed’s inflation outlook does not support easy policy. At the end of the day even the swap contracts for June indicate that the effective fed funds rate is low.

Meanwhile, a Bloomberg News report Bawest Bancorp It was considering its strategic options, doubling down on concerns that turmoil among smaller U.S. banks would claim more victims and tighten lending conditions.

Four U.S. banks have collapsed since early March, including First Republic Bank, which federal regulators seized this week. Powell called the First Republic’s resolution „an important step in drawing a line” under the banking mess.

However, the PacWest report prompted fresh selling in financial stocks in after-market trading.

„The market will be looking for signs that credit tightening will affect activity and labor market data,” said Vasily Serebryakov, FX and macro strategist at UBS Securities in New York. „As the central bank indicated a pause today, any weakness in the data would reinforce the view that the tightening cycle is over.”

Powell said Wednesday The U.S. is likely to experience what he believes will be a mild recession, but „in my view it’s more about avoiding a recession than a recession.” Wages are slowing, job opportunities are down, but unemployment is not rising, he said.

But at Milk conference Participants expressed concern. Guggenheim Capital chairman Alan Schwartz told Bloomberg Television that he is worried about the effects of the credit crunch and how far banks will have to pull back. Jenny Johnson, CEO of Franklin Templeton, also pointed to pressure on the banking system due to the pace of central bank hikes and the potential for further layoffs as a result.

Gundlach, co-founder of DoubleLine Capital, cited the Fed’s overall rate hikes from March 2022 and credit contraction as reasons he is „very bearish at the moment.” The central bank will not raise interest rates again following its recent hike, he said. „The recession odds are now very high.”