Because economic data hasn’t continued its steep drop starting with the payroll report, a high long-term inflation expectations reading from the University of Michigan last Friday, and Powell (and Mary Daly) going into the blackout period not dwelling on economic weakness, the bond market seemed to think Powell was going to be hawkish at yesterday’s FOMC meeting. I didn’t think so. All week and last, I had been writing my clients that he would do everything he could to stay neutral and he did. He wasn’t dovish, but the important thing for the bond market was that he wasn’t hawkish. I noticed three questions and answers from the press conference that help clarify where the Fed’s thinking is.

1. Powell tacitly concedes a recession is coming. When I heard this, my jaw dropped. He emphasized “for right now” as-if to say things will be changing. It helps to hear Powell’s tone in the video. [video]

Michael McKee (Bloomberg): There’s a worry on Wall Street, that when you say you want to study the net effect of the fiscal policies we may see on the economy, that you would end up waiting too long and be behind the curve in responding to any downturn. How can you reassure people that you can spot a problem early enough unless you decide to be preemptive?

Jerome Powell: Yeah, look, we are aware of it. We’re well aware of how things are going to evolve and the time frames and all that. We will use our tools to foster achievement of our goals to the best we can. Of course we are going to try to be timely with that. For right now, the hard data are pretty solid. We are obviously aware of the soft sentiment data and high uncertainty and we are watching that carefully and we think it is a good time for us to wait for further clarity before we consider adjusting our policy stance.

2. Despite the University of Michigan’s high long-term inflation expectations survey result last Friday, Powell affirmed that long-term inflation expectations are well anchored and mentioned that 5-year/5-year forward inflation expectations have fallen which I’ve been highlighting recently. [video]

Colby Smith (New York Times): You just described inflation expectations as well anchored but has your confidence in that assessment changed at all given the increase in certain measures and the high degree of uncertainty expressed by businesses, households, and forecasters.

Jerome Powell: So on inflation expectations, of course we do monitor inflation expectations very, very carefully, basically every source we can find. You know, and short-term, long-term, households, businesses, forecasters, market-based, and I think the picture broadly is this; you do see increases widely in short-term inflation expectations and people who fill out surveys and answer questionnaires are pointing to tariffs about that. If you look in the survey world, if you look a little further out, you really don’t see much in the way of an increase. Longer-term inflation expectations are mostly well anchored. If you look at the New-York for example. Then you have market-based and it is the same pattern. People and markets  are pricing in, in breakevens, some higher inflation over the next year, must be related to tariffs, we know from the surveys. But if you look out 5-years or 5-year, 5-year forward you’ll see that breakevens are either flat or actually slightly down in the case of the longer-term ones. So, we look at that and we will be watching all of it very, very carefully. We do not take anything for granted, it’s at the very heart of our framework, anchored inflation expectations, but that’s what you see right now.

3. Markets have conflated recent economic weakness (the LDEI has fallen 35 points since 2/13) with the trade war, but as I’ve been pointing out, a lot of this was data from January, before the Trump administration was there. Powell was asked about whether the administration’s policies were in the economic numbers yet and he didn’t think so. Powell’s answer gets a little off-topic but his statement at the end is what I am emphasizing. [video]

Edward Lawrence (Fox Business): …have we seen the new administration’s policies in the economic numbers yet, and when do you anticipate that happening?

Jerome Powell: In labor? or in other?

Edward Lawrence: In labor and inflation. Just across the economy, have we started to see the new policies take effect in the numbers?

Jerome Powell: You know, only in kind of an early way. I mean, its only been a few months, right. For example the layoffs that are happening here…they are certainly meaningful to the people involved and they may be meaningful to a particular neighborhood or region or area, but at the national level they are not significant yet, but we don’t know, we don’t know how far that will go. We’ll find out much more. I mentioned that you saw…we’ve had two very strong goods inflation readings in the last two months which is very unexpected and I think hard to trace it to specific tariffs, but it must have something to do with…it is either noise, and it will come back, and that is very possible too, but if it is persistent, then it must be to do with people buying ahead of tariffs or raising prices ahead of tariffs and things like that. Those kinds of things happen and they are very, very hard to capture. Because so much of it is indirect. A great example is washing machines were tariffed in the last round of tariffs and prices went up but prices also went up on dryers which were not tariffed so the manufacturers just kind of followed the crowd. So things happen very indirectly and so there will be a lot of work done in coming months to try to trace all that through but ultimately, it is too soon to be seeing significant effects in economic data.

My take-away from the FOMC meeting yesterday is that the economy is in a calm before the storm and that as long as long-term inflation expectations remain anchored, the Fed is ready to cut rates when weak data presents itself. The idea of a “soft-landing” is now completely gone.