Jerome Powell put a decisively hawkish spin on the Fed’s third rate cut in as many meetings, but he appeared to stumble into the “right” answer when pressed on what would compel the Fed to “take back” the “insurance” cuts.
Powell’s remark that only “serious inflation” would put hikes on the table mitigated his characterization of policy as “in a good place”, a description that, when taken in conjunction with additional language about the Fed’s current stance being “likely to remain appropriate”, clearly telegraphed that the Fed is done for now.
“We would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns”, Powell said during the press conference, in an apparent effort to walk back the implication that trade progress could eventually tempt the Fed to pivot back to tightening.
Of course, the real giveaway was probably the removal of the phrase “act as appropriate” from the statement.
In any event, Wall Street seems divided on what comes next.
For their part, Goldman is pretty sure the Fed is done. “The post-meeting statement and press conference delivered the message that today’s cut is intended to be the final step of a 75bp mid-cycle adjustment more forcefully than expected”, the bank wrote on Wednesday evening, adding that in their judgement, the bar for more cuts is now “quite high”.
Goldman references Powell’s discussion of monetary policy acting with a lag (which suggested the Fed wants to give the trio of cuts time to work their way through), his contention that the trade outlook has improved, his nod to movement on Brexit and, of course, the “in a good place” language.
For the Fed to consider more easing, Goldman says the committee would likely have to be thrown “a few pieces of very weak data or a combination of trade war escalation, an adverse market reaction, and fairly bad data”. The bank assigns just a 15% chance of another cut in December.
Credit Suisse generally agrees. “Today’s meeting makes it clear that there is a high threshold for further Fed action”, the bank said, in their own recap. “The FOMC believes policy is accommodative and will not consider easing further unless there are signs of labor market stress or a shock to financial markets”, a Wednesday afternoon note reads.
The bank does flag Powell’s belabored efforts to make it clear that hikes would entail a serious pickup in inflation, but ultimately, Credit Suisse “continues to expect this to be the last cut of the current cycle, and for rates to remain unchanged through the end of 2020”.
On the other side of the debate, Barclays says that while October marked the “end of insurance”, another cut in December is still the most likely scenario given a slowing pace of growth in the US economy.
“While the rate of growth in headline GDP in the advance estimate for Q3 modestly exceeded our expectation, we note that final sales to domestic purchasers posted annualized growth of only 2.0% in the quarter, down from 3.6% in Q2”, the bank writes in their Fed postmortem. “Business fixed investment declined for the second straight quarter and we expect some slowing in private consumption as gains in income and employment moderate and recent data on retail sales point to some slowing in consumer demand”, they continue, on the way to reiterating that in light of the expected growth moderation, they “expect the Fed to cut by 25bp one more time this year in December”.
BofA generally agrees with that, although they don’t see another cut until 2020. “We now believe that the Fed will not cut in December but we think that there will be sufficient evidence of weakness in the economy by early next year, prompting the Fed to deliver another cut in 1Q”, the bank muses.
SocGen offered something similar. To wit:
After a pause on rate policy in December and early next year, we expect the Fed to resume cutting rates in spring 2020. Evidence on the economy should turn softer at that time. Currently manufacturing weakness and early signs that employment gains are slowing should force consumption in the US to slow. We forecast another 100bp of rate cuts in the spring/early summer of 2020 (March-July).
Meanwhile, BNP says the focus has now shifted from insurance to data dependence, which pretty much by definition means that if the data keeps betraying a deceleration in the domestic economy, the Fed will keep cutting.
After noting that Powell wasn’t very forthcoming when pressed on how negative things would have to get to prompt the kind of “material reassessment” of the outlook he suggested would be a precursor to more cuts, BNP flatly states that whatever that threshold is, we’ll probably get there.
“We expect growth to average around 1.0% q/q saar over the next two quarters — almost a full percentage point lower than the Committee’s implied forecast”, the bank says, in the course of predicting that job growth will fall to the lower bound of the Fed’s breakeven range “next quarter and below it by Q1 2020”.
BNP then drives the point home in the most straightforward terms imaginable. “We still see the FOMC cutting rates at its December, March and June meetings”, the bank insists. “We do not see the 2019 Fed easing cycle remaining as a neat 75bp mid-cycle adjustment. We see 75bp more to go”.
Place your bets.