All things considered, Federal Reserve Chairman Jerome Powell delivered a deftly handled press conference this afternoon, seamlessly supported this time by those often confusing, always controversial, rate dot plots finally providing a useful, in this case powerfully dovish, backdrop to his central policy messaging takeaways.
*** Short of an actual rate cut — discussed but rejected in favor of more information, save for a lone dissent — Chairman Powell’s remarks, the statement’s new language to “closely monitor” the “cross currents” of incoming data amid “increased uncertainties” and, of course, the near free-fall in the rate projections across the forecasting horizon, could not have been more uniformly dovish. “A number of us have marked rate cuts,” Powell noted, then adding to accent the dovish consensus, “and those of us who didn’t still see the case for rate cuts having strengthened.” ***
*** On balance, we think the Fed is clearly open, albeit not yet fully committed, to a rate cut in July. But the bar is fairly low in that the decision will depend, not just on a softening in the data but crucially, on “the evolving risk picture:” if risks “continue to weigh on the outlook,” it would be enough for the Fed “to act as needed, including promptly, if that is appropriate.” The door seems equally open to a 50 basis point first rate cut, though our sense remains a 25bp cut is more likely, unless “sustained” risks and uncertainties start to truly “weigh” hard on the outlook. ***
*** But whether a first move is by 25 or 50 bp, it should be framed against the first ever easing cycle “in the dot era,” with the rate dot projections clearly mapping an apparent FOMC consensus for an accommodative stance for the next several years. What’s more, there is that curious inclusion of “promptly” that left us wondering whether it could be serving a dual purpose of both pointing to July, but also hinting at a tail risk inter-meeting move if a downside shock should materialize, for instance, if the G20 Summit turns sharply south? ***
A few other points of interest in today’s takeaways, starting with the story the rate dot projections tell of the new far more dovishly leaning Powell-led FOMC:
** The 2019 dots do display a stark bifurcation of an FOMC neatly split into two camps, with eight members marking one to two rate cuts this year as the appropriate policy path, while nine of their colleagues left their marks unchanged and a lonely Committee member still stood their ground with a single rate hike. Paradoxically, the “median” remains exactly the same, unchanged at 2.4%;
** But visually, just a glance at the projections across the forecasting horizon tells the story of what a looming easing cycle looks like: big drops in the 2020 median down, to 2.1% from the 2.6% median of a single rate hike marked in March (and down from 3.1% in September last year, when the FOMC was at its most hawkish);
** Indeed, the median of the FOMC rate projections doesn’t get back to the current 2.4% until 2021; and with the median longer run neutral estimate also dropping to only 2.5% — one Committee member even marked lower than that, while only four still put neutral at 3% or higher; that means, the FOMC is now projecting the policy rate will still be accommodative for the next three years going into 2022;
** The reasons for that were readily apparent in the Summary of Economic Projections: while the sharp downward mark in the 2019 PCE inflation to 1.5% drew a lot of attention, the median core PCE forecasts also fell a bit, to 1.8% from 2% — that alone would have been a big deal but now seems to be a sign of the persistent low inflation era — but perhaps more equally telling, the full range of inflation forecasts for 2019 fell sharply to 1.4%-1.8% from 1.8% to 2.2%.
** It was also interesting that the projections for real growth did not change at all for 2.1% in 2019 or barely at all through 2021, while the trend growth estimate remained at 1.9%. The full range of growth estimates for 2020 did widen out, however, dropping down to a low of .5% to a high of 2.3% compared to a narrower 1.7% to 2.2% in March.
And last, but still worth mentioning, Powell tersely dismissed President Trump’s assertion he may still want to “demote” Powell from his chairmanship of the Federal Reserve. “I think the law is clear that I have a full-year term and I fully intend to serve it.”