Jerome Powell Back In Hawkish Policy Lane? Why Economists Feel Fed's 'Higher For Longer' Narrative Hasn't Changed: 'Markets Need To Focus On The Fact That...'

Federal Reserve Chair Jerome Powell stated on Tuesday that a prolonged period of restrictive monetary policy may be necessary, refraining from offering explicit guidance on a rate-cutting strategy. Economists interpreted this as a clear indication that the central bank is likely to maintain a “higher for longer” approach.

The Hawkish Schiff: Economist Peter Schiff, in a post on X (formerly Twitter), challenged Powell’s characterization of the current monetary policy as restrictive, asserting that it remains loose. Schiff advocated for rate hikes, expressing concerns that prolonged loose policy would exacerbate inflationary pressures.

“The longer the Fed maintains its current policy, the further away from 2% inflation will rise,” he said.

Schiff’s remarks come against the backdrop of a robust economy and strong job growth. 

However, some economists, like Nobel laureate Paul Krugman, argue that consumer price inflation may not accurately reflect economic conditions, suggesting alternative measures such as the harmonized index of consumer prices, which excludes the owner-equivalent rent.

See Also: Best Inflation Stocks

Higher For Longer: Jamie Cox, Managing Partner at Harris Financial Group, said Powell picked a bad timing to have a “communication problem on the path of rates this year.”

The economist, however, does not see the need for rate hikes, given the strong labor market, unaffected and consumer spending, The typical consequences of hiking rates weren’t apparent in the economy, he said.

The economist also had a piece of advice for investors. “Markets need to focus on the fact that rates are sufficiently restrictive, instead of how many cuts are in the pipeline,” he said.

LPL Chief Economist Jeffrey Roach said Powell’s speech underlined his lack of confidence in inflation dynamics. “The Fed will likely stay on hold for longer than originally planned,” he said.

The central bank chief’s Q&A session showed that supply constraints were continuing to add to inflationary pressures and this could make it hard for the Fed, Roach said.

The bond market reacted to his comments, with investors now slowly coming to terms with the possibility of the central bank remaining on hold for most of this year, he said, adding, “Investors are reassessing risk appetite as Chair Powell is not confident that inflation is cooling enough for rate cuts.

LPL Chief Global Strategist Quincy Krosby said Powell was entering the “hawkish policy lane.” The Fed Chair essentially implied that the downward trajectory of inflation has essentially stalled, the analyst said.

“Moreover, he made it clear – rather than his more ambiguous stance regarding a rate easing timetable – that the ‘higher for longer’ narrative remains intact,” Krosby said.

‌”This was unfriendly for equity markets, but markets got the message.”

The 10-year bond yield edged higher and is approaching the 4.7% level, which it previously hit in early November 2023.

The major index futures are trading lower, pointing to another lackluster session on Wednesday.

The iShares 7-10 Year Treasury Bond ETF IEF settled Tuesday’s session down 0.39% at $91.36 and the SPDR S&P 500 ETF Trust SPY fell 0.18% before closing at $503.53, according to Benzinga Pro data.

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