CNN Analysis: Don't Panic About Powell's 'Credibility' Just Yet

The new chairman of the Federal Reserve, Jerome Powell, has adopted a different communication approach than his predecessors, causing confusion in the financial market. After the Fed decided to keep interest rates unchanged on Wednesday (29th), both U.S. stocks and bonds came under pressure. Some analysts questioned Powell's determination to curb inflation and the credibility of the Fed's policies.

However, CNN's analysis on Thursday (30th) pointed out that this market volatility does not necessarily mean that investors have lost confidence in the Fed. Rather, it is more likely that the market is still trying to figure out Powell's new language and policy rules. After all, the Fed's decision that day did not deviate from market expectations. The real cause of the unease may be that Powell refused to clearly explain the direction of the next policy.

Powell broke with the approach of the previous three chairs to increase policy transparency. He believes that if the Fed provides too many policy signals, the financial market will become a tool for predicting interest rate decisions. Once the market forms a consensus, officials may be forced to act according to market expectations, even if the economic situation has changed, making it difficult to adjust policies.

In Powell's words, the market should focus on the economic fundamentals, not try to influence the judge's decision.

However, the market has clearly not yet adapted to this communication strategy of providing fewer guidelines. The Dow Jones Index recorded its worst single-day performance in 15 months on Wednesday; the 30-year bond yield rose to a 19-year high, and the 10-year bond yield also approached the highest level since Trump's second term. Although U.S. stocks rebounded slightly on Thursday, the selling pressure in the bond market was not significantly relieved.

There are currently three main interpretations of the market: the Fed's credibility is being questioned, Powell is sending hawkish signals, and investors are still adapting to the new policy communication model.

First, some market participants believe that Powell, on the one hand, emphasizes that any inflation above 2% is unacceptable, but does not immediately raise interest rates or clearly acknowledge that interest rates may need to be raised in the future, leading to a gap between his statements and policy actions.

Powell stated on Wednesday that the Fed will definitely achieve the 2% inflation target and will ultimately be judged by actual results. However, the Fed decided with a vote of 9 to 3 to keep the benchmark interest rate in the range of 3.5% to 3.75%, while the three dissenters advocated raising interest rates.

The analysis points out that if the Fed verbally emphasizes anti-inflation but does not take corresponding actions, it may indeed make the market feel confused and even question its ability to fulfill its dual mission of stabilizing prices and promoting employment.

However, the so-called "credibility crisis" still has room for debate because the Fed's decision that day was exactly the result that most investors had expected. Before the meeting, the CME FedWatch tool showed that the probability of keeping interest rates unchanged was about two-thirds; the predicted market Kalshi estimated the probability to be 74%.

Powell has also repeatedly stated that the Fed will not announce future interest rate decisions. Therefore, if the Fed ultimately takes the action that the market originally expected, it is difficult to conclude that the central bank's credibility has been damaged just because Powell did not provide a policy roadmap.

The second interpretation is that the market has actually clearly received Powell's hawkish signals.

Powell proactively reiterated the 2% inflation target at the press conference and stated that inflation had clearly cooled down last month but was still not enough to prove that the anti-inflation mission had been completed. He also mentioned several times that companies have significantly increased their investment in artificial intelligence (AI), making the Fed's work of controlling inflation more difficult.

In addition, this time three decision-making officials opposed keeping interest rates unchanged and instead supported raising interest rates, also sending a signal to the market that the Fed may soon tighten policy. The CME FedWatch tool currently shows that the probability of the Fed raising interest rates in September is about 60%.

In other words, even if Powell refuses to provide clear interest rate guidance, the market will still look for clues from his wording, economic assessments, and voting numbers. The market's reaction on Wednesday may not be due to a lack of information, but may be investors judging that the Fed's policy stance is stronger than expected.

The third possibility is that the market is still adapting to the major transformation of the Fed's communication system.

Powell deliberately reduces policy information, making the outlook for interest rates more difficult to judge than in the past. The market has gradually begun to understand some terms, such as his "family argument," which refers to mutual respect for differing opinions among decision-makers; but statements like "think with vigilance, not wait with vigilance" still leave many economists struggling to grasp their exact meaning.

In the absence of clear guidance, the market can only adjust interest rate expectations on its own, which may not go against Powell's policy ideology. The Fed is not the only force that can tighten financial conditions. The yield on U.S. bonds will also affect the borrowing costs of companies and households, thereby curbing demand and economic activity.

Currently, market interest rates are clearly higher than the Fed's policy interest rates. The 2-year U.S. bond yield, which usually moves in line with the federal funds rate, is around 4.27%, far above the benchmark interest rate range of 3.5% to 3.75%. To some extent, the bond market has replaced the Fed in tightening the financial environment.

Whether the Fed needs to raise interest rates immediately is currently a two-sided argument.

Supporters of raising interest rates believe that the central bank should take action before inflation gets out of control again; those who advocate waiting point out that a considerable part of recent price pressure comes from the Iran war, with oil prices rising and falling rapidly, making the inflation outlook even more chaotic.

The U.S. labor market is still resilient but has weakened compared to previous months. If interest rates rise further, it may also harm economic recovery. Trump's continued public demand for lower interest rates has made the market even more focused on whether Powell can maintain policy independence under political pressure.

CNN's analysis believes that it is still too early to assert that Powell or the Fed has lost credibility. Powell is adapting to his new role as Fed chairman, and the financial market is learning how to interpret his language.

The violent volatility on Wednesday is more likely to be a period of adjustment under the new policy communication model, rather than the Fed's credibility having collapsed.