‘Leaning Too Dovish’: Wall Street Adjusts to Powell on Inflation

(Bloomberg) -- It was supposed to be a no-drama meeting from the Federal Reserve. Not quite.

After struggling to find a consensus, stocks came to a bearish verdict on Chairman Jerome Powell's pronouncements on interest rates and inflation. The S&P 500 Index fell the most in in five weeks after an initial rally quickly fizzled when Powell said the central bank has no bias to either tighten or ease monetary policy, noting that weak inflation readings may be “transitory.”

Here's how Wall Street market watchers reacted.

• Mike Ryan, chief investment officer Americas at UBS Global Wealth Management

“It's pretty clear that the Fed is on hold. There had been some expectations the Fed might somehow signal they are shifting or perhaps biased toward a rate cut. I think those hopes were dashed. While they certainly focused a bit on the fact that inflation is falling below the Fed's target, he also emphasized a number of times that it's transient, which suggests to me the Fed isn't going anywhere in a hurry.

“Those who were looking for or were expecting a much more dovish tone were disappointed, but to categorize the Fed's tone as hawkish, I have a tough time squaring with that.”

• Jeffery Elswick, director of fixed income at Frost Investment Advisors, which has $4.7 billion in assets under management

“The market is leaning too dovish now, they were leaning too dovish a week ago, they were leaning too dovish a month ago. Our view is that the Fed, the FOMC in particular, literally do not know what direction their next move will be nor when it will be. When they say they're data dependent, that's what they mean: They're data dependent.”

“The markets have by and large convinced themselves the Fed's next move will be a cut and it's going to happen sometime soon. In my opinion, that's not the FOMC's view. That's almost certainly not going to happen. A cut is probably a smaller probability between the three choices, and the markets are at some point going to have to reconcile to that notion. Or the data gets worse and then the markets will be proven right for a different reason.”

• Megan Horneman, director of portfolio strategy at Verdence Capital Advisors

“The market is maybe getting a little bit ahead of itself as far as what the Fed's next move is. Even though we had a weak ISM number today, some of the data has been coming in better than expected.”

“They're doing exactly what they need to do. They're waiting and seeing -- there's so many different things out there that we don't have clarification around -- the dollar being one thing, trade being another, the unwind of some of the weakness in the first quarter. Inflation is the biggest one -- what is the inflation environment going to look like going forward -- and how do you really marry all of that with some underlying fundamentals that are turning more positive?”

• Chris Gaffney, president of world markets at TIAA

“Fed will remain on hold – no indications that they have either a dovish or hawkish bias. There was some volatility in the markets during the short period in between the Fed announcement and Chairman Powell's press conference due to the lowering of the Interest on Excess Reserves (IOER). The markets read this move as being a dovish indicator as investors took this move as an indicator that the next interest rate move will be a cut in the Fed Funds rate. This is what drove the dollar lower and also triggered a drop in interest rates across all maturities of the US Treasury curve.”

• Bob Miller, BlackRock head of America's fundamental fixed income, told Bloomberg TV.

“The market was leaning a bit more aggressively toward a more dovish outcome and I think you're seeing in the price action since the statement was released, but more importantly since the press conference started, you're seeing the price action suggest that expectations were a bit too high with respect to the likelihood of a much more dovish outcome, including the potential for a cut. I also think the market misread the technical adjustment to IOER, which was a reduction of 5 basis points, as increasing the probability of a rate cut.”

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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