Jerome Powell got the stock rally he was(n’t) after on Thursday.
However things ultimately turn out — which is to say, wherever US shares closed on Thursday or Friday or next Tuesday — the fact that the S&P was up ~2% 24 hours on from Powell’s press conference and the Nasdaq 100 nearly 3%, was a testament to the all-too-familiar criticism that a Fed which gives the market an inch is a Fed which should expect to cede a mile.
As regular readers will readily attest, I was a vocal advocate for this week’s 50bps rate cut. But — note the emphasis — just as I was adamant that the Fed shouldn’t chance putting a hawkish spin on a dovish inflection point, I was also insistent that the Fed shouldn’t tip too much additional 2024 easing in the dot plot. This is a balancing act. A 25bps cut would’ve risked financial conditions tightening such that the market effectively “undid” the cut before it was even implemented. But a 50bps cut with a dovish dot plot risked amplifying the easing impulse through the risk asset channel, and thereby stoking the kind of animal spirits which can rekindle price pressures.
The ideal mix on Wednesday would’ve been a 50bps cut with 25bps of additional easing tipped for the balance of the year. The Fed almost got there. The dot plot was a close call. One widely-followed commentator called the September decision a “hawkish 50/25/25” to which Fed “whisperer” Nick Timiraos chided, “Come on, is there really such a thing as a hawkish 50?”
No. The answer to Nick’s question is “no.” Or, wait. Yes. A “hawkish 50” would’ve been 50 with one more (or no more) cuts penciled in for this year. And, again, that’s where the Committee should’ve landed. Would’ve, should’ve, could’ve.
Powell did his best to strike a balanced tone in the presser, the dot distribution admitted of some hawkish nuance and there was Bowman’s dissent, but to Nick’s point: The market will be forgiven for ignoring all that to trade “50 with 50 more ‘promised'” by year-end.
If Powell felt like he needed to redeem himself with stocks after the worst FOMC trade since 2022 (the rout that accompanied the late-July / early-August growth scare), he was well on his way Thursday.
To be as frank as possible (Thursday was a frank day), it makes no difference to me what the Fed does. I have money making more money in money market funds (so high rates are ok) and like everybody else (where “everybody” actually means almost nobody in the context of America’s hopelessly skewed wealth distribution), I have money in risk assets (so low rates are ok too, and it anyway doesn’t matter because stocks rally regardless these days). I also have gold. And Bitcoin. And some NFTs I’ll never be able to sell. And on and on. So, whatever they do, I’ll be ok. If you’re properly diversified, you’re a dispassionate observer, at least as it relates to your own finances.
But the serial Op-Ed writer in me is compelled to take a view, and my view is that the decision to “promise” 50bps of easing over the next two meetings was red meat for the bulls. (Can bulls be cannibals?)
See that (the simple chart)? That’s fun, but it could also be problematic if it ends up loosening financial conditions at a time when the economy’s still expanding at a healthy clip.
There’s something contradictory about Powell’s characterization of September’s rate cut as a “recalibration” and the 200bps of easing tipped by the Fed between Wednesday and end-2025. That’s one helluva “recalibration.” If I didn’t know any better, I’d be inclined to call it a fairly aggressive cutting cycle. (Stocks don’t know any better.)
The Fed’s argument is simple: The risks around the dual mandate are now balanced, so policy needs to proceed down towards neutral and in fairly expedient fashion. Nominal neutral’s ~3%, the Fed reckons, so you’ve got 200bps of cutting to do, and if anything, 15 months is pushing it when it comes to “expedient,” particularly given clear evidence of slower jobs growth.
It’s hard to argue with that as stated. And I wouldn’t. Argue with it. But what I would say is that just because you have a plausible theory about how things should go doesn’t necessarily mean you have to go public with it if you believe doing so might somehow impede your capacity to execute on your strategy. And another melt-up on Wall Street could conceivably impede the Fed’s efforts.
Powell would tell you this is all nonsense. That I’m thinking far too hard about it. And that when it comes to the dot plot, everyone just submits their forecasts, and that he can’t influence them. That’s true, but it’s also a lie. Powell’s plainly adept at herding cats. He got the Committee to 50 this week, after all. He could’ve easily engineered a median 2024 dot that tipped 75bps of total easing instead of 100. Silly as this most assuredly is, that — Powell’s “failure” to goal-seek a higher median 2024 dot — might be viewed in hindsight as a mistake.
In the simplest possible terms: It’ll be very difficult, bordering on the impossible, for the Fed to justify a November rate cut if stocks run away higher between now and the next meeting without additional (and material) labor market weakness to cite.
The Cleveland Fed’s inflation nowcast has September core CPI at 0.3% MoM and 3.1% YoY. The Atlanta Fed’s GDPNow tool has Q3 growth tracking 3%. Jobless claims were 219,000 in Thursday’s update. And now we have SPX 5700. What if it’s 6000 by November? A “data-dependent” Fed’s going to justify a follow-up cut how? Only by way of a sharp deterioration in the labor market, which Powell repeatedly said on Wednesday the Fed doesn’t see.
Agree. Powell was too nonchalant about the 100bps for 2024. Sometimes I wonder if he knows what he messing with (i.e., markets), but then I recall the end of 2018, Aug (or so) 2019, 2021-22. He knows. I guess he forgets.
H put it well in a different piece when he said Powell made an “unforced error” by allowing market to bank on 100bps of easing before 2025. Powell needlessly risked losing control of the markets and rekindling inflation, along w/ a number of other problems. Japanese yen-USD and energy worth watching for signs of market/economy getting ill. Powell is a good-hearted person. All he had to do was head for the sidelines until 2025. What was he thinking?
Suppose Powell is more concerned about employment than he lets on? Then he might worry less about the inflationary effect of bullish markets, and might quietly welcome whatever trickle-down there may be from asset prices to Main St.
“Powell is a good-hearted person”
I agree with this. No sarcasm. He’s a good dude. He really is. Which is high praise coming from me, because I harbor a dour view of humanity.
Hopefully, a top-tier historian writes a narrative about Powell that captures well his heartfelt approach to overcoming (or trying to overcome…) many political and economic challenges. The job has worn him down but he can look ahead to a Fed-free future soon. He did the country a favor by staying in the job despite Trump’s attacks.
Trump in February: “I think [Powell’s] political. I think he’s going to do something to probably help the Democrats, I think, if he lowers interest rates.”
WSJ in April: “Trump Allies Draw Up Plans to Blunt Fed’s Independence”
Trump in August: “I feel the president should have at least say in [setting interest rates], yeah, I feel that strongly,”
Fed in September: BOOM, there’s 50, bigmouth — and more where that came from, if needed!
“I don’t know, Leslie. I think we might be talking about a .22 caliber mind in a 357 Magnum world.”
You were hot, Jay. You were hot.
Repeating a possibility I posted on The Fate of the World- a melt up post 50 point cut into the gamma unclench of Friday’s options expiry could open up a wider trading range.
And my gut feeling is there is a higher than normal chance of market volatility coming up due to seasonality and the election. Geopolitically, there are many players who may do something to affect the election. I’ll be happy if none of that happens, But if tomorrow morning is up, I’m likely to purchase some downside protection speculatively.
Perhaps the seasonal was delayed a month or so. Contested election, geopolitical events, economy moving along (jobs holding up) and no cut in November can take 10% off the market quickly. Not a prediction which most of us are crap at, anyway. To, H’s point, the assets will be fine…until they’re not.
To your last sentence- I think Powell will pretend he doesn’t see the weakness in the labor market just like he pretended not to see the inflation.
When it’s impossible to pretend any longer, he’ll admit too many people are unemployed. That will probably take at least a couple years to play out.
I see Waller saying he could support another 50 bp if the labor market weakens.
I’m sorry, the blurb I read was misleading. His statement wasn’t so pointed.
To the extent they are, I don’t understand why this Fed is so hell-bent on cutting at that November meeting. The ECB cut, then skipped. The BoE cut, then skipped. The Fed looks like it wants to cut, cut, cut and cut some more. It’s not a matter of being in a “hurry” or a “rush” to get down to neutral. They can still “hurry” and “rush” down to neutral by skipping November and cutting 50 again in December (i.e., instead of 25/25). If anybody on the Committee is seriously entertaining the idea of 50 in November and then another 50 in December, that’s just crazy barring a sudden stop for the labor market.
This “We gotta go again immediately” mindset makes it seem like the jobless rate is about to spike to 5.5% or something. I mean, this shouldn’t even be a discussion in my view: The economy’s fine, the labor market seems still pretty much ok, you just cut 50, so why is the default not to wait until the next SEP meeting? If possible, you go at a quarterly cadence, and line up the cuts with the release of new economic projections. That’s obviously possible here, so why isn’t it the go-to option?
H-Man, not sure 50 and 50 to end the year is crazy. 5.5 became 5 when the 50 landed and take another 100 by year end and we are at 4. Subtract inflation rate 1.86 but to keep the math simple, call it 2 and you now have a real rate of 2%. That may be the juice that is needed to keep this a soft landing rather than a crash and burn. In light of how debt burdened the consumer is with no pricing power, it may be just what the doctor ordered.