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Goldman: The Odds Of A Rate Cut Were Already Low, Now They’re Lower

Powell quickly reversed [the] initial impression.

Markets appear to have calmed down a bit after Wednesday’s afternoon whipsaw, which came courtesy of a rather odd pairing between a dovish Fed statement and a subsequent press conference that found Jerome Powell emphasizing (and reemphasizing) the notion that pressures on inflation may well prove “transitory”.

To be clear (i.e., in response to a couple of reader e-mails), it’s not that it’s bad for Powell to play down the prospect of rate cuts. In fact, that’s probably healthy considering that outside of the inflation excuse, there’s virtually no economic justification for a cut. There’s already enough speculation that Donald Trump exerted an undue influence on policy early this year and a rate cut when unemployment is at a five-decade nadir and the economy is growing at a 3.2% clip would only serve to underscore concerns about Fed independence.

So, the problem (certainly) isn’t that Powell downplayed market expectations for a cut. Really, there’s no “problem” at all, it’s just that Wednesday seemed to be another example of a situation where Powell’s approach to press conferences served to create unnecessary confusion, something we always maintained was likely from the time he characterized his communications strategy as “plain English”. Powell isn’t particularly adept at obfuscating and his inexplicable insistence on standing for the entirety of every press conference works against him – he comes across as uncomfortable at various intervals.

Wednesday witnessed an outsized swing in rates which probably isn’t healthy given that, ultimately, the idea was to simply convey a neutral stance on policy with perhaps a slightly dovish bent but an eye towards clarifying that no cut is imminent. That could have been accomplished in the statement, with no press conference needed.

“The turnaround from the statement to the press conference was clearly visible in market pricing [and] the roughly 10bp change in the 2yr rate from the initial dovish take on the statement to the hawkish take on the press conference is quite unusual”, Goldman writes.

(Goldman)

“While the FOMC statement was largely as expected, a couple of small details appeared to lean dovish at first glance [but] Powell quickly reversed all three of those initial impressions during his press conference”, Goldman goes on to say, before recapping the “transient” discussion as detailed extensively here on Wednesday afternoon.

Read more on Powell’s ‘transitory’ factors presser

Ultimately, Goldman says Wednesday’s meeting “reduced the odds of a rate cut in response to low inflation, which we already saw as quite low.” Here are some additional reasons why (from the note):

  • The FOMC left the description of survey-based measures of inflation as “little changed” in its statement, choosing not to make a downgrade in response to the decline in the University of Michigan measure.
  • Despite repeated questions, Powell refused to discuss hypothetical cases in which the Fed might cut, noting instead that the FOMC does not see a strong case for moving in either direction.
  • Powell also rejected the idea that the weak recent inflation data had anything to do with the Fed’s rate hikes and noted that the contributor to inflation that the Fed does have some control over is labor market slack

On that last point, Goldman notes that “the only way the FOMC could confidently boost inflation is by deliberately pushing the unemployment rate even lower than its current 3.8% rate, which we think most FOMC participants would be reluctant to do.”

Not everyone is convinced that the Fed will be wholly “reluctant” to go that route. In fact, there’s rampant market speculation that Clarida’s comments from last month suggest they (the Fed) might do just that at some point in the future.

In any case, for now, speculation of an “insurance” hike has been dampened, much to the chagrin, one imagines, of a certain US president.

Better get Stephen Moore in there quick…


 

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