Jerome Powell and the boustrophedon

If we are looking for the principle that guides Jerome Powell in his communication with the markets, we can find it in the boustrophedon style of writing that goes from right to left and then from left to right. Used in archaic Greece until 402 B.C., this type of writing was inspired by the march of an ox marking its furrow in a field.

Likewise, it is an understatement to say that the tone of the Fed Chairman’s last press conference after the FOMC meeting on 31 January was almost the opposite of that adopted at the euphoric December press conference, which followed a much more rigorous exercise in November.

However, there has been no significant change in the macroeconomic context between the two dates, either in terms of job creation, which remains robust (>250K on average over the last 2 months), or in terms of underlying inflation, which is still falling very gradually (3.9% in December, 4% in November) but is still far from the 2% target.

On the importance of the 2% inflation target, we mentioned several times last year our conviction that neither the Fed nor the ECB would deviate from the strategy hammered out by all the central banks in the OECD zone since the start of the inflationary crisis: namely to wait for underlying inflation to return to this strict target on a sustainable basis before cutting rates. The memory of the misdiagnosis of the transitory nature of inflation, maintained until autumn 2021, still has a certain dissuasive power. We are therefore maintaining our more hawkish view than the consensus on the timing of the first cut, which we expect to take place at the end of the first half of the year at the earliest.

Since Jerome Powell’s press conference on 31 January clarified the upcoming March meeting under pressure, the market is no longer anticipating a cut on this date but continues to assign a 100% probability of a 25bps cut for the following session in May.

As a result, we believe that the increase in contained volatility seen since the start of the year on short and long rates in the US and Europe (maximum amplitude of 35bps on the 2-year and 10-year curve points) will continue as central banks increase the frequency with which they adjust market expectations of the timing of rate cuts.