Fed Chair Jerome Powell survives a critical week, faces bigger tests

That type of confusion over signaling is the kind of thing Powell will need to avoid as the Fed gets near the end of its tightening cycle. It’s also critical to keep in mind as the Fed continues to unwind its balance sheet, which is loaded with about $4 trillion in bonds it purchased to stimulate the economy.

There are doubters that things can go smoothly.

“In sum, what happens next is watching Powell act out on his belief that he can let the economy manage itself and thereby hold the funds rate steady for an extended period, as [Alan] Greenspan did in the mid-1990s,” Steven Blitz, chief U.S. economist at TS Lombard, said in a note, referring to the former Fed chairman.

“We think [Powell’s] belief will prove misguided — the situation today is so very different,” Blitz added.

There’s another wrinkle ahead for Powell and the markets: News conferences after every meeting from January 2019 forward, meaning that every time the Federal Open Market Committee gets together to talk policy, a rate hike is possible. Previously, Fed chairs have met with the press only after quarterly meetings, and the committee hasn’t hiked rates once, without a chance to explain why afterwards.

The potential is there for either clarity — or confusion.

The market has suddenly taking an optimistic attitude towards the Fed — “symptomatic of despair” and “grasping at straws” was how Gluskin Shuff strategist and economist David Rosenberg put it. That could easily be quelled by one slip of the tongue in public, as Powell already has discovered.

“It’s going to be very important,” Prudential’s Krosby said. “The Treasury market and the other markets are going to be watching.”

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