In the cold clear air of the morning after, and before the release of the November Federal Open Market Committee meeting Minutes this afternoon, we would make four points about Chairman Jerome Powell’s “just below” speech before the Economic Club of New York yesterday that turbo-charged such powerful rallies across the markets.
*** First, we did not take Chairman Powell’s carefully scripted description of current rates as “just below” the broad range of estimates” of neutral necessarily as dovish as the market’s initial reaction. What we did take away, however, was a confirmation of sorts that within that broad range of views on neutral, a likely majority of the Federal Open Market Committee is leaning toward a pause of some length next year to assess the lagged effects of the accumulative rate hikes, including the near certain mid-December rate increase (SGH 11/16/18, “Fed: A Premium on Policy Flexibility”). ***
** Indeed, bearing in mind such a broad range of neutral estimates, rather than taking yesterday as a correction solely to a “misperception” of October’s hawkish intent, it might be better to describe Chairman Powell’s new “just below” phrasing as marking the low end to a “bracketing” of where a neutral policy stance will ultimately prove to be, with the hawkish October unscripted remark as its high end. An uncertain number of rate increases requires a cautious approach — the groping in the dark metaphor — and it was noteworthy that the Chairman again stressed rate policy will not be on a preset course and that he did not repeat the “further gradual” phrasing.
** In that sense, we still think the main policy messaging remains the greater uncertainty around the pace and frequency of rate hikes next year; whether none or as many as three (or more for that matter) depends, as Vice Chair Richard Clarida noted in his own speech earlier this week, on the meeting to meeting assessment of where the data is indicating the policy rate to be relative to a desired neutral policy stance. But given yesterday’s deliberate affirmation of recent language used by other Board Governors, we continue to suspect Powell’s own leanings lie at the lower end of that range.
** And on the debut release of the Fed’s new Financial Stability Report, it was not insignificant that Chairman Powell noted the last several business cycles were ended by “destabilizing financial imbalances.” There may be for now only “moderate” risks to financial stability, but the Fed now has the formal means of publicly assessing where it believes the financial risks and vulnerabilities threaten; if stock markets were to resume a heady rise in “stretched” valuations, or fixed income term premiums and credit spreads became excessively compressed again, the Fed’s language might be more foreboding — and with it, we suspect, financial stability increasingly becoming a larger factor in the policy framework going forward.