The 2-year has fallen 12 basis points since Jerome Powell’s speech and interview yesterday. On the surface, he didn’t say anything new. But it was a shift because he reaffirmed his pausing stance for the first time since he last spoke about monetary policy at the last Fed meeting on 9/20. This is despite strong economic data in ISM Manufacturing, Non-Farm Payrolls, CPI, and Retail Sales in the meantime (see table below.) Fed speakers in the last two weeks have emphasized pausing in the face of good economic data, but his endorsement before the 2-week blackout period ahead of the next Fed meeting was important.

A year ago, the run of strong economic data in Q3 would be grounds to raise 50 basis points, and so to hear that Powell and the Fed is mostly looking past it confirms a Fed that no longer wants to raise. They have achieved solidly positive real rates across the yield curve, their “higher for longer” jawbone campaign has moved long-term rates significantly higher, and feedback to the Fed is suggesting that high rates are causing acute business pain.

It represents a slight shift in the Fed’s reaction function. Economic data is still important, but it seems the Fed is sensing economic weakness beyond it. As Federal Reserve Governor Christopher Waller said in a speech on Wednesday,

“…it seems clear that economic activity was substantially higher for July through September than earlier in the year. The question is whether that acceleration of real activity will be sustained. Sometimes an uptick in activity is followed by some payback, or slowdown.”