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‘Is This It?’ Jerome Powell Signals Fed On Hold Until Something (Else) Crazy Happens

"The current stance of monetary policy is likely to remain appropriate".

“Monetary policy is in a good place”, Jerome Powell said, kicking off another one of his signature “plain English” press conferences following a third consecutive rate cut from the Fed.

That assessment skewed hawkish, as did the removal of language promising to “act as appropriate” from the statement.

“The current stance of monetary policy is likely to remain appropriate”, Powell said, adding that  “monetary policy acts with a lag” and that “the effects will be realized over time”.

Read more: Fed Takes Out More ‘Insurance’, Cuts Rates For Third Time, Drops ‘Act As Appropriate’ Language

Likely conscious of the potential for his characterization of policy as “appropriate” to be interpreted as hawkish, Powell was quick to note that “policy is not on a preset course”, a line he’s leaned on habitually during his tenure, whenever he feels like he might have irritated risk assets.

The October FOMC meeting came more than six weeks after an acute squeeze in short-term funding markets forced the Fed to intervene with overnight and term repo operations. On October 11, the Fed officially announced the commencement of “organic” balance sheet expansion (“QE Lite”, as it’s affectionately known) at an initial pace of $60 billion per month, with the aim of alleviating reserve scarcity.

Powell was deliberate in emphasizing that the effort to replenish reserves and return to an “abundant regime with a buffer” is “purely technical” and part of the learning process. The Fed, he said, continues “to learn about the appropriate level of reserves”.

He then drove home the point. “Our [T-bill] purchases should not be confused with large-scale asset purchases”, he insisted. Post-crisis measures were aimed at “eas[ing] broader financial conditions”, while organic balance sheet growth via bill purchases “should not affect financial conditions more broadly”, Powell remarked.

His performance in the Q&A wasn’t great, but it wasn’t a disaster either.

“Is this it?”, Bloomberg’s Michael McKee asked, effectively demanding to know whether the mid-cycle adjustment is over. “So, what we’ve said is that we see the current stance of policy as remaining appropriate”, Powell responded, delivering a non-answer.

Powell also said the “risks to the outlook have moved in a positive direction” since September, a contention which had the potential to get him into trouble.

Sure enough, a reporter from the Washington Post immediately asked him to specify what it is that’s “moving in a positive direction”.

“I was really referring to trade developments”, he said, citing the “Phase One” trade deal between Donald Trump and Chinese Vice Premier Liu He. “It appears that the risk of a no-deal Brexit has materially declined”, he added.

Asked by the New York Times what would compel the Fed to take some of the cuts back, Powell was quick to point to subdued inflation. “We really don’t see that risk” of a sharp upturn in inflation. “We’re not thinking about raising rates right now”.

Seemingly realizing he may have put too much emphasis on trade optimism, he later reiterated that any rate hikes would be contingent on inflation moving higher.

CNBC’s Steve Liesman decided to be a real pain. “Can you help me out with the meaning of the word ‘appropriate’?”, Steve asked. “Are you on hold or not?”, he pressed.

Powell essentially refused to answer in what ended up being a slightly contentious exchange as far as Fed press conferences go.

“I strongly believe we took the right action today”, Powell said of the October rate cut. “As long as our outlook holds, policy is appropriate”.

As a reminder, we’re nearly to the point when accommodation from central banks may no longer be viewed as preemptive, and thereby bullish for risk assets.

Any more rate cuts wouldn’t be “insurance and a mid-cycle adjustment, but a response to a deeper economic slowdown”, Bleakley Financial Group CIO Peter Boockvar said in a note Wednesday afternoon. “A market that loves easy money should not be rooting for more rate cuts from here because it means we have bigger economic problems to deal with”, he warned.


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