Wall Street economists don’t believe Powell changed his tune much

Indeed, some of the more hawkish economists on the Street stuck to their forecasts.

Jan Hatzius, chief economist at Goldman Sachs, still thinks the Fed will hike four times in 2019, which is above the current indications from the Federal Open Market Committee’s closely watched “dot-plot” estimates. The FOMC sets interest rates for the Fed, and the dots represent where each member sees rates.

Where the market saw a major shift from Powell, Hatzius saw only nuance. He characterized the Powell speech as “in line with prior remarks.”

The chairman highlighted “both the significant uncertainty around neutral rate estimates and the fact that current rates remain below the lowest of the Fed’s model estimates of neutral. He reiterated a gradual path — interpreted in our view to mean quarterly rate hikes — as the middle ground between the risks of hiking too quickly and too slowly,” Hatzius wrote.

Similarly, J.P. Morgan also still sees four hikes ahead. Michael Feroli, the firm’s chief U.S. economist, said the market may have read a little too much in the difference between Powell’s October and November remarks.

“The shift in emphasis is clear” between the two comments, Feroli wrote. “The literal differences between the two sets of comments are less stark.”

In fact, Feroli figures Powell basically said the same thing both times — the Fed remains “a long way” from the consensus neutral rate of about 3 percent, and is “just below” the range of estimates that span 100 basis points.

Ultimately, the Fed will be moved most by forward economic developments such as the government’s monthly nonfarm payrolls report, which Feroli expects to be strong.

“With respect to the neutral rate we didn’t find too much at odds with previous Committee communications,” he wrote of Wednesday’s Powell speech. Of market reaction, he cautioned that “financial market jubilation at the prospect of a pause could eventually plant the seeds of its own undoing.”

Bank of America Merrill Lynch economists also think the market took an overly dovish view of the speech.

They point to comments that indicated the Fed isn’t sure where neutral is, and that there is a lag between rate hikes and their impact.

“We believe he shifted from his comments in the fall by underscoring data dependency and the lags in the monetary policy while walking away from the need to move into restrictive territory,” Ethan Harris, global economist at BofAML, said in a note. “The speech read more dovish than his prior remarks but was not, in our view, a dovish speech.”

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