Fed: “A Mid-Cycle Adjustment”

Published on July 31, 2019

Try as reporters did in pressing Federal Reserve Chairman Jerome Powell to confirm further rate cuts, he deflected several times and sought instead to reframe today’s 25 basis point rate cut as a “mid-cycle adjustment” in a longer arc of the policy shift since December from signaling more hikes to a neutral patience to today’s rate cut. But he did not offer much more than that.

*** The apparent press and market frustration notwithstanding, we took Chairman Powell’s carefully parsed language and the statement itself to signal the Federal Open Market Committee is tilting to a second rate cut to ensure a “somewhat more” accommodative stance to support the still favorable economic outlook. But, as we expected, he pushed back, hard, against any takeaway suggesting the FOMC expects today’s rate cut to be the start of an extended easing cycle. ***

*** Indeed, as we wrote last week (SGH 7/16/19, “Fed: The July Cut”), the majority FOMC consensus looks likely to us to cut rates a second time in either September or end-October to “reset” the policy rate back below neutral and to “recenter” inflation expectations. But it would take a significant deterioration in the data or a downside shock in the second half of the year to warrant “swifter” and deeper rate cuts, which the FOMC stands ready to do, if necessary. ***

“Let me be clear”

As the presser went on, it was almost painful to listen to Chairman Powell strive to stick to the script of the intended messaging of a more restrained accommodative signal than either reporters or the markets were expecting; indeed the Dow was dropping nearly 500 points when he was apparently being taken to be saying “one and done.”

He walked that back a bit before he left the podium to affirm a single cut is probably as unlikely as a series of rate cuts.

“Let me be clear,” Powell finally said, casting Fed speak subtlety aside. “I said it’s not the beginning of a long series of rate cuts. I didn’t say it’s just one or anything like that. I said when you think about rate cutting cycles they go on for a long time. The committee is not seeing that.”

It was a fair point to make with an economy still growing above trend and, indeed as Powell at one point was at pains to note, growth was as strong in the first half of this year as last year when the Fed had essentially finished with its rates normalization to bring the policy rate to or near its best estimates of neutral.

And with the two dissents perhaps restraining the Committee from reaching further towards an even more reassuring, pre-emptive insurance, we thought Chairman Powell did a decent job to stick to the script of the Fed policy messaging indicating a clear willingness to provide modestly more accommodation, if needed, but to steer clear of signaling a gloomier economic outlook that would mean a more aggressive rate path was being set in motion.

If there was some question of whether the Chairman would be willing to push back against market expectations and pricing for deeper rate cuts, he just did. We will see if the policy messaging by Fed officials going into the thin liquidity of the August dog days is further refined to soften the bruises in some pockets of the market.

But for now, the Fed policy messaging would seem starkly clear, even if it is not necessarily welcomed in other parts of the capital.

Back to list