Fed: Jerome Powell’s “Bottom Line”

Published on July 11, 2019

In his testimony and remarks before the House Financial Service Committee yesterday, Federal Reserve Chairman Jerome Powell did not so much hint at the likelihood of a 25-basis point rate cut at the July 30-31 Federal Open Market Committee as he did all but guarantee one.

A few takeaways from yesterday as Chairman Powell begins his return appearance this morning before the Senate Banking Committee:

** While we thought a 25 bp rate cut would be the far more likely outcome to the FOMC meeting in exactly three weeks’ time (see SGH 7/1/19, “Fed: The Run-up to the July Meeting”), we were frankly expecting Chairman Powell to leave himself at least some optionality yesterday. So we were a bit taken aback by how decidedly, unmistakably, dovish he was across the four hour stretch of his testimony. “The bottom line for me is the uncertainties around global growth and trade continue to weigh on the outlook,” he affirmed. 

** Indeed, nowhere did the Fed Chairman even gently push back on the market pricing and political demands for a July rate cut, and he in fact stayed so firmly on point — risks to the outlook from trade uncertainties, weakening global growth, eroding business confidence, and muted inflation that threatens to persist — and was so unwilling to dilute his dovish takeaway that the more hesitant views of some FOMC members on the merits of an immediate rate cut failed to even get a mention, essentially tossed under the rate cut bus. 

** The Chairman may calibrate his policy takeaways somewhat this morning, but even with the decent CPI print this morning, it is unlikely to alter the set expectations for a July rate cut and, now, better than even odds on a second “insurance” cut in September. And while we remain fairly certain the FOMC won’t signal July as the start to an easing cycle, nor do we sense a consensus forming for a 50bp first rate cut, both those assumptions could change if the upcoming key data points like retail sales or the inflation expectation surveys turn sharply south. 

In addition, we will be curious to see whether Senate Banking Committee members today probe a little deeper in their questions put to Chairman Powell on two issues:

** The first is an underlying sense if not suspicion of how political pressure is playing into, not so much the near-certainty for a July meeting rate cut, but why the Chairman was so relentlessly dovish and dismissive of other Committee members, some of whom have spoken since the June meeting, who are clearly still unconvinced on the merits of immediate rate cuts? Traditionally, a Chairman takes pains to reflect the views of the entire Committee, even if they were all apparently sympathetic to the case building for a more accommodative rates stance. 

** On this front, we would note that White House trade advisor Peter Navarro’s alleged remarks being tweeted by a markets columnist this morning that Chairman Powell “promised” President Trump he would be “dovish on interest rates” would be highly damaging to the Fed’s credibility if true. But even if it is not confirmed and more widely picked up by the mainstream press, it nevertheless underscores the widely held suspicion of many in the markets and Capitol Hill, not to mention the intention of the White House, of an unavoidable political framing to the Fed’s policy decisions going forward.

** The other question we hope one of the Senators will ask is whether the value of the dollar, in light of the aggressively dovish turn in policy signaling by the European Central bank, is also a factor in the all-out dovish messaging Chairman Powell clearly strove to convey yesterday. There was an unspoken chess-like gamesmanship last January for instance, when ECB President Mario Draghi got ahead of the Fed’s January meeting policy pivot and by that measure, Chairman Powell may have been seeking to return the favor this month.

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