Markets think Powell 'blinked' in Dallas

Getty ImagesFederal Reserve Chairman Jerome Powell speaks during a Financial Stability Oversight Council meeting Oct.16, at the Treasury Department in Washington, D.C.

It wasn't easy to parse the comments Federal Reserve Chairman Jerome Powell made in Dallas last week.

Related: Fed watchers left puzzled by what Powell was trying to communicate

But while he was in classic, two-handed economist mode - talking about the strength of the U.S. economy while also noting headwinds abroad, and in housing - markets seemed to have reached a conclusion that he was dovish.

You can see the difference looking at the CME's FedWatch calculator, which derives probabilities based on trading in fed funds futures contracts.

Put another way, the weighted average of interest rate forecasts for the end of 2019 has dropped by about 10 basis points.

The yield on the 2-year note TMUBMUSD02Y, +0.00% , sensitive to Fed policy, has dropped sharply over the last week as well.

"The markets have decided that Chairman Powell defiantly blinked," said Steven Ricchiuto, U.S. chief economist for Mizuho Securities USA.

Ricchiuto said he would have blinked - "in light of recent economic and financial market development" - but he's still not sure that Powell did.

That's because, looking at the dot plot, the Fed believes the so-called neutral rate where policy is neither stimulative nor restrictive is 3%.

The Fed is currently targeting rates between 2% and 2.25%, with expectations of another quarter-point hike in December.

"This 100 basis point difference suggests there is a risk the chairman stepped outside the box when making these remarks and that other Committee members may walk him back in the weeks ahead," Ricchiuto said.

That said, Vice Chairman Richard Clarida's comment from Friday that "we are close to neutral," if anything, reinforced a dovish slant.

"Clarida had to know it contradicted Powell's 'we are still a long way from neutral,' from a month ago, and was likely a correction for what now appears to have been a misstep by the chairman. Indeed, Clarida's further comments about the neutral rate - that the short-run rate is likely lower than the long-run rate, that the FOMC could take fed funds to the short-run neutral and then adjust it later as neutral rises toward its long-run equilibrium - suggests the Fed could pause tightening as soon as the beginning of next year," said Chris Low, chief economist of FTN Financial.

New York Fed President John Williams took a similar tone as he toured the Bronx. "Our goal is to keep this expansion going for as long as possible," he said. Williams also reiterated the Fed message of "gradual" tightening.