Powell revives hopes of a Fed pivot. That’s a bad thing

Federal Reserve Chair Jerome Powell made investors very happy on Wednesday. US stocks popped after the central banker gave a speech strongly indicating that the Fed would ease the historically-high pace of interest rate rises at its next policy meeting in December.

But investors who are expecting a full pivot may be putting the cart before the horse. Powell’s admission that “the path ahead for inflation remains highly uncertain” means that rate hikes could be here for a while.

What’s happening: Investors have been closely watching for any clues that the Fed might slow or pause its painful path of rate hikes, intended to fight persistent inflation. But their search for signs has led to a hopeful distortion of facts: Powell says “moderate” and investors hear “pivot.”

“The time for moderating the pace of rate increases may come as soon as the December meeting,” said Powell in remarks at the Brookings Institution, his last public appearance before the central bank enters a blackout period ahead of its December 13-14 policymaking meeting.

Investors celebrated. The S&P 500 ended its three-day losing streak and closed up 2.7% on Wednesday. The Dow officially entered a bull market. The 10-year Treasury yield also eased on the news.

Market rallies can lead to counterproductive easing in financial conditions and boost the economy, which is the opposite of what the Fed is trying to do with its tightening policy. Powell tried to do some hawkish “jawboning” by signaling that the FOMC will keep hiking well into 2023, but investors didn’t seem to mind.

“By any standard, inflation remains much too high,” said Powell. “It will take substantially more evidence to give comfort that inflation is actually declining.”

Searching for Atlantis: Investors are seemingly addicted to the highs and lows of any perceived shifts in the Fed’s thinking, leaving markets excessively volatile. That’s exactly what the Fed doesn’t want to happen.

St. Louis Federal Reserve President James Bullard warned this week that the stock market is underpricing the risk of a continually aggressive Fed.

This isn’t the first time investors rushed into markets on the belief that there would be a Fed pivot. The last time the market ran with a similar narrative over the summer, it didn’t go so well. Powell responded with a very hawkish speech at Jackson Hole that sent markets plummeting. The Fed ended up delivering more hikes in the months that followed.

The bottom line: The Fed has increased its benchmark lending rate six times this year in an attempt to discourage borrowing, cool the economy and bring down historically high inflation that peaked at 9.1% over the summer and has since slowed to a still uncomfortably high 7.7%, according to the latest Consumer Price Index.

Even if interest rate hikes ease a bit, they will remain high, and economists are largely expecting that the US economy will endure a recession next year. Powell said on Wednesday that there is still a chance the economy avoids recession but the odds are slim. “To the extent we need to keep rates higher longer, that’s going to narrow the path to a soft landing,” he said.

Congress likely to avert supply chain crisis

The House on Wednesday approved legislation to avert a rail shutdown that could cost the US economy $1 billion in its first week alone.

The resolution, which passed 209-137, would force unions to accept a tentative agreement between railroad managers and workers that was reached earlier this year. It would also make an imminent strike illegal. It comes following a grave warning from President Joe Biden about the economic danger posed by congressional inaction.

Without legislation, a rail strike could become a reality as early as December 9, causing shortages, spiking prices and halting factory production. It could also disrupt commuter rail services for up to seven million travelers and the transportation of 6,300 carloads of food and farm products a day, among other items, according to various business groups.

That potential supply chain crisis hasn’t completely been squashed just yet. The bill now heads over to the Senate. But it’s likely that the bill will pass — Congress has voted to stop or end rail strikes in every instance going back to the 1960s.

Another, less likely, provision: Separately, the House agreed to add a provision to the rail agreement that would increase the number of paid sick days from one to seven. The additional sick leave was added at the insistence of progressive members of the House who had threatened to scuttle the rail agreement bill if the provision wasn’t included.

The provision was added using an arcane tactic that will enable the Senate to pass the original rail agreement without including the sick leave measure.

It is unlikely that there is support for that provision in the Senate: White House press secretary Karine Jean-Pierre told reporters on Wednesday that the Biden administration doesn’t think the Senate has the 60 votes needed to pass the sick leave measure.

Job openings are falling in the US

The number of job openings in the United States dropped in October.

There were 10.3 million available jobs last month, down from nearly 10.7 million in September, according to the latest monthly Job Openings and Labor Turnover Survey (JOLTS) released Wednesday by the Bureau of Labor Statistics.

But the labor market still remains historically tight despite the Federal Reserve’s efforts to cool demand and bring down inflation.

“Elevated job openings during a time of an economic slowdown implies that the labor market may remain tight for quite some time,” wrote Jeffrey Roach, chief economist for LPL Financial in a note Wednesday. “Firms could hoard workers even though the economy may go through a recessionary period.”

There were about 1.7 job openings for each job seeker in October, down from 1.9 in September, according to BLS data.

Bad news: “The mismatch of labor supply and demand has been an irritant to the Federal Reserve, which has been striving to vanquish historically high inflation while also hoping to recover lost credibility,” Mark Hamrick, senior economic analyst for Bankrate, said in a statement.

Fed Chair Jerome Powell said on Wednesday that he is no longer optimistic that workers will return to the labor market and take open jobs to fix the mismatch between available jobs and workers, which drives up wages. “Excess retirements might now account for more than two million of the three and a half million shortfall in the labor force,” he said.

The government jobs report for November is expected Friday morning.

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