Fed On Hold, But Out Of ‘Patience’. 8 Officials See Lower Rates In 2019

“We’ll see what he does”, Donald Trump said Tuesday, when asked about his embattled Fed chair, following reports that the White House counsel explored options for removing Jerome Powell in February, at the president’s request.

During those same remarks to reporters, Trump explicitly tied Powell’s future as Fed chair to Wednesday’s FOMC decision.

Now, that decision is in the books. The Fed kept rates unchanged, but gone from the statement is the reference to “patience”, replaced with a commitment to “closely monitor the implications of incoming information for the economic outlook and… act as appropriate to sustain the expansion” in light of what the Committee characterizes as “increased uncertainty about the outlook.” Bullard voted for a cut and while that isn’t surprising – some desks had penciled it in – it does mark the first dissent of Powell’s tenure (unless you count Donald Trump).

The inflation outlook was marked lower, and noticeably so on the headline measure. That said, the growth outlook for this year remained unchanged. The Fed is split on the outlook as eight officials see rate cuts this year, with seven of them seeing two cuts. That’s clearly due to the downward revision in the assessment of inflation. Fed funds futures showed higher odds of a cut next month following the decision.

Remember, Powell’s “transitory” narrative was cause for consternation for those hoping that cuts are in the cards, and both the statement and the SEP appear to suggest that officials are beginning to doubt whether “transitory” is an accurate description. That’s a win for the doves.

Most analysts expected some members’ dots to project a cut, but whether the median shifted was up for debate. On the SEP, 2019’s projections were expected to be marked down, with the less enthusiastic assessment reflected in the first paragraph of the statement. The “patient” characterization was widely expected to be jettisoned in favor of a pledge to remain vigilant in the face of rampant uncertainty. Just six months ago, “patient” was a wholly dovish characterization of policy, as it marked a stark contrast with active rate hikes and passive tightening via balance sheet rundown. Now, “patient” could be construed as wholly hawkish, as it would fly in the face of market pricing and potentially derail some of the most crowded trades on the planet.

The setup could scarcely have been more dramatic. Trump’s trade war has cast considerable doubt on the outlook for the global economy, helping to make the cause for so-called “insurance cuts”. The uncertainty surrounding the tariffs has forced the FOMC’s global counterparts to adopt a dovish lean, raising Trump’s ire and prompting the president to accuse America’s trading partners of currency manipulation. There’s more than a little irony there.

Read more: ‘Patient’ Is So Passé: Full June FOMC Preview

Meanwhile, the US economy looks as though it’s on the verge of rolling over, but the data is far from conclusive in that regard. The lingering effects of Trump’s fiscal stimulus are still insulating the US from the turmoil abroad and the president (not to mention his advisors) continue to insist that the domestic economy is strong, making calls for rate cuts seem all the more misplaced. Again, the irony is glaring.

Here’s how the data has evolved:

(Goldman)

Headed into the June meeting, Powell was also confronted with the distinct possibility that the president plans to roll back the tariffs and call off the trade war once rate cuts are in the books (or once the Fed pre-commits). That’s the “crazy like a fox” theory, and it would amount to Trump having manipulated the Fed the same way he played OPEC last year.

There are still other possibilities. The Fed must also weigh whether cutting rates and leaning dovish risks exacerbating the trade war, by giving Trump the monetary policy backing he needs to push the envelope. And then there’s the biggest worry of them all – the permanent politicization of the the most important institution in the world.

As far as markets are concerned, S&P performance headed into June was not consistent with how stocks behaved around other recent dovish shifts.

(Goldman)

Risk assets bounced off the May rout after the Mexico escalation cemented the case for rate cuts in the minds of market participants.

But bond yields have collapsed, inflation expectations have moved sharply lower and crude refuses to bounce despite the risk of conflict in the Mideast – all signs that investors fear the worst for global growth. Indeed, the latest edition of BofA’s Global Fund Manager survey shows investors harbor the most bearish outlook on the global economy since the crisis.

Meanwhile, the dollar has stubbornly refused to respond the decline in real rates, a state of affairs that partially reflects the relative tightness of US monetary policy and underscores why the president is so concerned about the Fed amid the trade war.

Clearly, the risk headed into the June meeting was of disappointing rampant market expectations for a dovish outcome, if not an actual cut. Any hawkish lean risked an unwind at the front-end and in myriad crowded plays on the easing narrative.

Over the last three weeks, JPMorgan, Barclays, BofA, Credit Suisse, BNP, etc. have all thrown in the towel and predicted cuts, although the expected timing varies.

It would appear that the Fed has at least delivered on expectations in terms of the statement language. Additionally, with eight officials seeing cuts, markets will probably be some semblance of satisfied that the message has been received. All eyes will turn to Powell’s press conference, where the Fed chair will be asked about all of the above, and more.

Bullet point highlights

FED LEAVES RATES UNCHANGED, SAYS UNCERTAINTIES HAVE INCREASED
FED CLOSELY MONITORING INCOMING INFO, WILL ACT AS APPROPRIATE
FED SPLITS ON OUTLOOK AS 8 OFFICIALS SEE LOWER RATES IN 2019

Statement

Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points.

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