Fed: Push Back

Published on May 1, 2019

It would have been very hard not to notice how Federal Reserve Chairman Jerome Powell referred to “transient” inflation a gazillion times in his press conference as an intended takeaway from the two-day Federal Open Market Committee meeting just ending this afternoon.

*** The Chairman was unmistakably firm in his push back against the speculation for a near-term rate cut, asserting the FOMC remains “comfortable” with its current neutral-ish policy stance and that it does not see a strong case for moving rates “in either direction.” He sounded like a Chair keen to temper excessive market expectations, and it would appear there is little appetite within the broader Committee for a pre-emptive “insurance” rate cut. And in any case, retaining the two-meeting interpretation of the “patient” guidance language all but rules out a June rate decision. ***

*** At the same time, however, we think the door to a rate cut is nevertheless being held slightly ajar. For one, we suspect there isn’t enough confidence just yet the recent inflation softness will indeed prove to be transient. We think the uncertainty over the inflation dynamics will in fact keep a “threshold” case for a rate cut on the table, however low its probability, until at least September to see how inflation data play out, as well as whether favorable trade and fiscal policies seem likely to add to the mix in the second half of the year. ***

We would make just two points in how we see the Committee debate and consensus evolving from here that would suggest caution in dismissing the implications of the inflation debate on rate policy:

** First, we thought it telling that the FOMC opted not to describe the recent softness in inflation as “transient” or “transitory” in the formal language of the statement. Instead, the Committee acknowledged that both headline and core inflation have “declined and are running below 2 percent,” albeit in the factual descriptive first paragraph of the statement rather than the more policy-loaded paragraph with the patience language. 

That to us suggests there isn’t enough confidence on the transient nature of the weak inflation to generate a consensus view within the Committee, at least not yet. But equally, that they chose to keep the reference to lower than desirable inflation to the statement’s factual descriptive first paragraph rather than with the policy signaling patience language would suggest there also isn’t a consensus yet on the sort of sustained weak inflation that is drawing so much of the concern among the more dovish-leaning Committee members. 

In other words, the inflation debate is hardly over. 

** Second, on that score, we found it interesting that when pressed for the third or fourth time in the press conference over what conditions would trigger a rate cut consideration, Chair Powell pushed a rate cut scenario as far from a near term prospect as he could by rhetorically falling back on the safety of the Fed’s “constitutional document” — the annual “Statement on Longer-Run Goals and Monetary Policy Strategy: if the low inflation persisted, and if the Fed concluded it was at risk of becoming sustained and pulling down inflation expectations, “that is something we would take into account.”

Assuming a rate cut was indeed one of the “alternative scenarios” Chair Powell said the Committee discussed in addition to the baseline case – we took the Chair’s disciplined messaging to mean the notion of an “insurance” rate cut may have been too aggressive a step for the Committee majority, its pre-emptive nature too abrupt of a shift in the Fed’s more conventional data-driven reaction function. 

But at the same time, we suspect a more data-determined “threshold” case for a rate cut is still very much alive. If low inflation proves not to be transient but persisting and threatening to become embedded in falling inflation expectations, the case to recalibrate or reset the policy rate down to a lower neutral level will remain a live thread in the Fed policy debate beyond the June meeting and into probably at least the September meeting. 

Presumably by then, cleaner, less noisy data will dictate whether the Fed moves off its patience in either direction.

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