Fed: An Agnostic Cut

Published on October 30, 2019

The main takeaway we drew from the Federal Open Market Committee today was of a Committee majority who seem to be pretty pleased with the policy stance after this third rate cut to a 1.50%-1.75% fed funds target range, with the base case now for an extended pause.

*** If the data continue to show a modestly slowing but still above trend growth, and a still tightening labor market with muted inflation, the Fed could be on hold well into next year; but if data deteriorate sharply enough to trigger a “material reassessment” of that outlook, the FOMC will move fairly quickly to rate cuts, even aggressively. ***

*** Against the backdrop of the seeming “truce” in the US-China trade wars, the diminishing tail risk for a No-deal Brexit, and what the Fed sees as a continuing resilience to US consumer confidence and spending, the probabilities on a December rate cut are justifiably falling to less than maybe one in five odds. ***

*** All else being equal, however, while Chairman Jerome Powell was to our ears ever so slightly more hawkish than the more carefully neutral statement language, we would still see a very modest easing bias to the Committee leanings, primarily due to the asymmetrical downside risk in the uncomfortable proximity to the Zero Lower Bound. ***

A few other points:

** The formal statement was carefully constructed to be as shorn of any meaningful near-term policy guidance as possible. The economy was generally described in a positive way — in a “good place” — and the previous boilerplate guidance sentence to “act as appropriate” was stripped of its action verb to leave a clearly more neutral assessment of the “appropriate” path going forward;

** Chairman Powell likewise did his very best to stick to the script of guidance neutrality, but that said, on the margin, in noting that policy operates with a lag after pointing to the accommodation since the January policy pivot, and in later asserting current policy is “likely to remain appropriate,” all that to our ears reflected a reluctance for any further near term rate cuts;

** Chairman Powell was also given multiple opportunities to offer a more hawkish message, but he refused to take the bait: the main impetus to a rate hike would be inflation, he noted, which while perhaps climbing back to mandate consistent 2% mark, is highly unlikely to rise to threatening levels;

** Tellingly, he also avoided any reference to market “excesses” or “imbalances” that might also warrant tightened financial conditions. If memory serves us, the next Financial Stability Report is due to be released in November, and there would seem to be scant evidence for any significantly alarming takeaways in its assessments;

** But how we square the circle of this slightly more hawkish reluctance with what we still sense is an easing bias lies in a point we previously made (SGH 10/28/19, “Fed: “A Stopping Rule”), namely, that the risk management-driven “insurance” cuts are likely to have drawn to a close after today’s rate cut, and going forward, it will take a “material reassessment” of outlook to trigger further accommodation;

** Left unsaid today, however, is that with only 150 basis points of rate space before confronting the complications of the Zero Lower Bound again, we still believe there is a very solid Committee consensus, hawks and doves alike, to respond “swiftly and aggressively” to maximize the monetary punch if the data should indeed worsen;

** One last point, we thought Chairman Powell deftly handled this balanced messaging in the presser, with hardly a ripple in any of the markets today. In that sense, he looks to have achieved a primary communications goal to smoothly move away from explicit near-term policy guidance, which in theory, leaves the FOMC with maximum policy flexibility going forward.

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