The Federal Reserve’s policy statement was pretty clear on Wednesday. In contrast, Fed Chairman Jerome Powell was less so, a top Fed watcher said.
“The difference between this statement and the February statement was pretty clear communication. What the additional messaging we were supposed to take from the press conference is very unclear,” said Adam Posen, president of the Peterson Institute for International Economics.
The Fed’s unanimous vote Wednesday to raise interest rates a quarter point suggested that officials had consensus on the road ahead for the economy.
But instead, there were more questions than answers.
“Communication has not been this team’s strong point,” Posen said.
See: This is why stocks tumbled after Fed’s Powell signaled only one more rate hike in 2023
Krishna Guha, vice chairman of Evercore ISI, said the initial Fed announcement was received well enough, but “markets soured as Powell spoke and slumped afterwards.”
As a result, stocks
ended sharply lower on Wednesday.
Here are four crucial questions that economists flagged in the wake of Powell’s press conference:
How bad will the coming credit crunch be?
Powell said that it was just too soon to know how severe the tightening of credit would be for households and businesses.
“It is just so recent. It is very difficult There’s so much uncertainty,” Powell said.
Scott Anderson, chief economist at Bank of the West, said “in the end, it appears the majority of FOMC participants saw the additional bank credit-tightening due to the banking system instability over the past two weeks as equivalent to one additional 25-basis-point rate hike from the Fed.”
Ian Shepherdson, chief economist at Pantheon Economics, said that he was worried “the risk of an aggressive tightening of credit conditions is quite severe, not least because surveys of both borrowers and lenders make it clear that lending standards already have been tightening for a year.”
The Fed seemed nervous, but not panicked, he said.
Was this the last rate hike?
Powell said Fed officials were uncertain about the path ahead for interest rates. He stressed that the Fed believes “some” rate hikes “may” be necessary.
But analysts said the Fed chairman seemed to open the door for this to be the last rate hike for a while.
“There is a good chance that this is the last hike of this cycle, barring surprisingly strong inflation or jobs reports in the next few months,” said economists at Contingent Macro, in a note to clients.
Economists at Bank of America disagree. They see the Fed hiking rates once more in May, to a terminal rate of 5%-5.25%.
“We think the risks are in the direction of an earlier end to the tightening cycle,” said Michael Gapen, U.S. economist at Bank of America Securities.
Investors in the derivative markets see an even chance of a rate hike in May, according to the CME FedWatch tool.
Will there be rate cuts this year?
“Rate cuts are not our base case,” Powell said.
The central bank’s “dot plot” penciled in one more rate hike, to a range of 5%-5.25%, and no other changes.
But Bill Adams, chief economist of Comerica Bank in Dallas, said an initial rate cut could come within three to nine months.
“For the time being, I am lightly penciling in a first cut in September,” Adams said, in a note to clients.
Also: Powell says no rate cuts in 2023, but the bond market doesn’t agree
Traders see the first rate cut coming in July, according to the CME FedWatch tool.
What was Powell’s biggest takeaway from the collapse of Silicon Valley Bank?
Powell seemed struck by how rapidly depositors fled Silicon Valley Bank two weeks ago.
“We know that SVB experienced an unprecedented and rapid and massive bank run,” he said. “It was a very large group of connected depositors in a very, very fast run, faster than the historical record would suggest,” Powell said.
“The speed of the run is very different from what we’ve seen in the past but it does kind of suggest there is a need for possible regulatory and supervisory changes because supervision and regulation need to keep up with what’s happening,” he said.
Read more: Powell says ‘all depositor savings’ in U.S. are safe