“At the risk of kicking a man who’s already been kicked enough, Jerome Powell’s ‘plain English’ has an abysmal track record”, we warned, on Tuesday evening.
With Esther George and Eric Rosengren lodging dissents against Wednesday’s 25bp rate cut, Fed Chair Powell was tasked with using his press conference to convince markets he’s capable of building consensus around more cuts in the remainder of the year.
Headed into the July Fed, one of the biggest risks was that market participants would get the impression that “insurance” really means “insurance”. That is, with so many people convinced that the July cut in fact marks the onset of an honest-to-goodness easing cycle, any overt nod to that not being the case chanced upsetting a number of apple carts.
Read more: Fed Cuts Rates For First Time Since 2008. George, Rosengren Dissent
Suffice to say Powell’s press conference did not go well in that context.
Specifically, he went too far down the road towards indicating that Wednesday’s rate cut isn’t necessarily the start of an easing cycle. He described the move as “a bit of insurance” and a “mid-cycle adjustment”.
To be sure, everyone knew the cut would be couched in terms of “insurance”. Analysts across desks as well as current and former officials spent the better part of two months drawing parallels to historical “insurance cuts” and extolling the virtues of being proactive – especially when operating near the zero lower bound.
Powell’s task was to make sure that the obligatory “insurance cut” narrative (necessary to give the committee plausible deniability for a cut when the economy is still strong) was accompanied by enough hints and wink, wink-type soundbites to placate markets that are expecting at least two additional cuts.
Seen in that light, the idea of a “mid-cycle” adjustment (in contrast to the start of cutting cycle), was precisely the wrong thing to say. And neither was it a particularly good idea for Powell to say “this isn’t the start of a long series of rate cuts” out loud, to people with working ears.
He tempered that a bit by noting that although this is “not the start of a long cutting cycle”, the Fed “could cut again”, but the market was already priced for more cuts, which means his acknowledgement that an additional cut is possible was, in some sense anyway, insult to injury.
The dollar surged, which was precisely what Powell needed to avoid. One look at the following chart, and Donald Trump is likely to blow a gasket.
Stocks plunged over the course of the press conference, while two-year yields spiked all the way up to ~1.96, before coming back in.
Powell was completely inept at using trade uncertainty to his advantage. In fact, things first started to go awry when he noted that after “coming to a boil” in early June, trade tensions had “returned to a simmer”. That was interpreted as hawkish.
As he attempted to elaborate on trade jitters, Powell appeared to become uncomfortable with the prospect of coming across as critical of Trump’s policies.
“Let me be clear here. We play no role whatsoever in assessing or evaluating trade policy”, Powell said, abruptly. “We’re not in any way criticizing trade policy, that’s really not our job”.
Asked by Fox News whether the Fed waited too long after the December hike to effectively take it back, Powell said “We don’t hear that from businesses”. “They don’t come in and say we’re not investing because the Fed funds rate is too high”, he continued.
The questions about further cuts never abated. Powell was interrogated relentlessly on if and when more easing is coming.
“Are there any circumstances that you would not go ahead with further easing at this stage?”, one reporter asked. “Once you’ve embarked on this easing, you’ll have to at least move one more notch?”, he pressed.
Powell wasn’t amused. “Our policy will depend on evolving risks to the outlook. We’re going to be monitoring the implications of incoming information”, the chair bristled. “That’s where I’ll leave you for that”.
If you are Powell….it boils down to the fact , do you or do you not want to go down in history as a complete capitulating sack of s..t or not…
Answer appears to be a NO…..end…
Going into this meeting, Powell’s hand was already forced. As you have pointed out, market expectations forced his hand, and a failure to cut would have been a disaster. Perhaps he didn’t want his hand forced in September as well, and was willing to take the hit now instead of facing a September meeting where the market priced it a cut and he didn’t deliver. He just left a meeting where there were two dissenting votes, and we don’t know if there were others who reluctantly agreed to this cut. It would be hard to emerge from a meeting where there was unenthusiastic support for a 25 basis point cut, and suggest that many more cuts were coming. It’s hard to dampen expectations without upsetting the traders who have predicted multiple cuts.
agreed
My impression of Powell is that he is, at least in part, attempting to be frank with investors, rather than feeding them a line. The Fed cannot promise 75 bp of cuts at this point, because 1) the economy is not clearly entering recession, 2) the Fed needs to hold well over 150 bp of potential rate cuts in reserve for when the next recession does develop, and 3) 2.25 – 0.75 = 1.50. It would take a manipulative double-speaker to promise investors that the Fed will deliver rate cuts that it cannot deliver, and Powell is, it appears, not that man. Two dissents suggest that even if Powell (or whoever is chair) were so inclined, he still will not be able to deliver.
Good comments, jyl and Uni102
So, the market has been climbing to new highs and valuations near post Tech Bubble highs, in the face of 2019 SP500 EPS growth of only about +2% and declining 2020 estimates, by 1) hope for a China deal, 2) hope for multiple rate cuts, and 3) solid consumer-related data. With 1) and 2) fading, will 3) be enough?
From the January 2018 highs to the July 2019 highs, SP500 is only up about +5% or about +3% annualized, but has delivered two -7% drawdowns and one -20% drawdown along the way. This looks to me like slowing trend growth with rising volatility, which isn’t great to observe.
“The questions about further cuts never abated…” Look, I get Fed-fetishing haruspicy and almost syllable-vivisecting semantical obsession by the punchinello (mostly pom-pomming) financial media jackals, for some neon oracular assurance of market direction. It’s just the way the evermore avaricious plutocrats have set up the (Hunger~) game optics for the 70% of this country that have no actual relevance to markets, so that they can take “economic” talking points back to their respective political lairs.
But the incessant information jackals of today’s pod-under-your-bed media are now almost past strict Orwellian gravity and appear much more to be themselves hoodwinked-conscripted shills of some wretched, degenerate camp movie – like “Idiocracy” or a Simpsons episode.
All of this means nothing to the reality of the zeitgeist, here. I’m just saying that it’s exhausting, generally no better than simians/Trump throwing darts at a listing of the MM indexes, and despite the parasitic attachment to every goddamned semantical mis/step, there are no sages out there who can predict anything outside of swing-trading~ish trends. The markets are gonna do what the plutocrat/bankster caprices define by the way they apportion their money. Algos have changed things but no more than all technological changes have “radicalized” societal functions and – subsequently – been subsumed into the normal course of things.
Nobody’s gonna predict a bigger bubble or a historical crash, despite the hubristic arrogance of the tech age. Powell can fart and the flying monkey CNBCers/FBN cheerleaders/WH economic advisors(!) will all make political hash out of the smell; but when people can’t afford those pickup trucks and $7 Frappucinnos – it won’t matter how talented a tongue Powell has/n’t…
Yep.
I think that it is wrong to use the stock market’s reaction to the Fed’s decisions as the criterion upon which we evaluate those Fed actions. The Fed should get high marks if unemployment stays low, the dollar trades in a reasonable range, inflation remains about 1 to 2 percent, the economy continues its expansion, and most of all, our banking system remains strong. Let stock and real estate prices fend for themselves if the Fed continues to get those big picture items correct.
They need to keep expectations in check to see how the end of QT plays out. I suspect the damping impact of contracting the money supply during 2019 has been greater than most believe. The market will continue to get pulled higher after some short term weakness. He is right not to let investors get over their skis, which he’d only have to pull back later by hiking.