“Our views changed significantly”, Jerome Powell said Wednesday, following the first unanimous Fed decision since May.
He was describing policymakers’ epochal dovish pivot in 2019 that saw the Fed cut rates three times in the face of proliferating risks to the outlook including the trade war and a fairly deep manufacturing slump abroad.
Powell then took a victory lap of sorts. “As the year progressed, we adjusted policy to cushion the economy and provide insurance against risks”, he said, noting that in the end, “this shift has helped support the economy and has kept the outlook on track”.
“The current stance of monetary policy will likely remain appropriate”, he went on to say, parroting the Fed’s new mantra, while being careful to add the obligatory caveats about the potential for a “material reassessment” in the event conditions warrant and policymakers’ commitment to “respond accordingly” should the situation deteriorate. Powell also reiterated old faithful: “Policy is not on a preset course”.
In the Q&A, CNBC’s Steve Liesman tried to play “gotcha” (he traffics in “gotcha” queries, under the guise of asking “good” questions). “Within 7 months of the 1998 rate cuts, the Fed took them back and then some”, Steve said. “Are these cuts the kind you need to take back if the risks don’t materialize? Or is this a kind of steady state going forward?”
Powell navigated that pretty deftly. To wit (truncated):
So there are conceptual similarities. The economy needed slightly more accommodation but it’s not the end of the expansion. What’s different is, you have very different structural characteristics in the economy, especially with inflation. The need for rate increases is less. Unemployment can remain at quite low levels without upward pressure on inflation. That’s a good thing. And that’s quite different.
Having cleared the Liesman hurdle, Powell ran up against the hard question – namely whether he agrees with the BIS’s assessment that structural problems in the repo market haven’t been completely addressed. The bank’s analysis (which accompanied their quarterly review) grabbed headlines over the weekend.
In and of itself, that would have been a pretty easy question. For all the fanfare, the BIS’s assessment was relatively straightforward, although you wouldn’t know it to read some of the more bombastic headlines (ours, as quoted above, was actually pretty tame).
Unfortunately for Powell, the reporter also brought up Zoltan Pozsar, who this week delivered the latest edition of his “global money notes” for Credit Suisse. It was, as usual, largely impenetrable, but this time, it struck a chord with a wider audience thanks to September’s repo tumult.
Read highlights: ‘The Day The World Stops Spinning’ – Zoltan Pozsar Calls For QE4
“Will you be taking any extra steps to make sure FX swaps and repo markets function properly going into year-end?”, the reporter asked, citing Pozsar, without mentioning him by name.
Surprisingly, Powell did a decent job fielding the question, although he largely dodged the complex issues.
“We’ve been very carefully looking at the reasons why [September] happened”, he said, referencing the seizing up of short-term funding markets. “We’re open to ideas about modifying regulatory practices in ways that don’t undermine safety and soundness”, he added, an allusion to the prospect of lifting some of the liquidity requirements that analysts (and Jamie Dimon) have pointed to as an aggravating factor.
“That plan is working. Repo markets are functioning well”, Powell continued, essentially arguing that the combination of O/N and term repos, and bill purchases should be enough to keep things under control, a contention that Pozsar took direct aim at on Monday. Powell continued:
You asked about year-end. Temporary upward pressures are not unusual around year-end [and they] appear manageable. Our repo operations and bill purchases should mitigate those. We stand ready to adjust the details of our operations to keep the funds rate within our target range. If it does become appropriate, we would purchase short-term coupons. But we’re not in that place.
That last bit was a nod to restarting QE proper, as Pozsar suggested would likely become necessary. Clearly, Powell couldn’t go too far down that road in his response, but just touching on coupon purchases was likely enough – at least he’s aware that folks are having this conversation outside of wonk circles.
As far as the long-rumored standing repo facility, Powell remarked that “we’ve had a couple of meetings where we’ve discussed that”. He didn’t deliver any new information. “It’s going to take some time to evaluate and create the parameters and put into place”, he said.
Asked about the apparent discrepancy between forecasts for inflation below target and an eventual rate hike (he was asked “how do you square that circle?”) Powell said that “in terms of that out-year rate increase, none of us have much of a sense of what the economy will look like in 2021” so any projections for higher rates are just a reflection of the assumption that eventually, the policy rate will move up towards estimates of the neutral rate.
Later, Powell emphasized that the US-China trade deal means more for markets than the USMCA does. He declined to comment on his recent meetings with Donald Trump.