Jay Powell’s press conference swerves muddy outlook on US rates
After weeks of market pressure and internal debate, Jay Powell, the Federal Reserve chairman, pulled the trigger on the US central bank’s first interest rate since the financial crisis.
That was the easy part.
While Wednesday’s announcement of a 25 basis point cut was in line with market expectations, the press conference that followed showed how challenging Mr Powell will find guiding investors on what happens next.
When the Fed chairman said that the move was a “mid-cycle adjustment in policy” — not the start of a full-blown easing cycle, which would imply multiple and possibly deep rate cuts — investors were spooked.
“The press conference muddied the waters,” said Julia Coronado, an economist at MacroPolicy Perspectives. “Even if the Fed’s own thinking hasn’t changed much, and the bar is still very low for another rate cut, the lack of clarity on the motivation and the baseline thinking and the triggers for action leave markets more confused.”
Mr Powell’s unwillingness to commit to deeper monetary easing with great force represented a contrast to the consistently dovish messages sent by Fed officials in the weeks leading up to the Fed meeting, in a series of speeches, congressional testimony, and media appearances.
Mr Powell and his colleagues had laid out the rationale for preventive easing in great detail, as a way to tackle low inflation and interest rates around the world, and protect the US from weaker conditions in the world economy, including the impact of trade tensions. At one point two weeks ago, the dovish drumbeat had grown so loud that some investors were even betting that the Fed could act more aggressively, with an immediate cut of 50bp, with several more to follow before the end of the year.
Yet while the Federal Open Market Committee statement signalled that the Fed would “act as appropriate to sustain the expansion”, suggesting it still had a bias towards easing, Mr Powell’s remarks stressed that the central bank would look carefully at the data before making its next move — so much more stimulus could not be guaranteed.
Dissent on the FOMC
The dissent of two FOMC members — Esther George of the Kansas City Fed and Eric Rosengren of the Boston Fed — may have factored into the more cautious approach to easing described by Mr Powell. Both officials had signalled they wanted to see more evidence of a real hit to the US economy before approving interest rate cuts. No one dissented by calling for more dramatic easing.
“Chair Powell appeared very reluctant to suggest that additional rate cuts were likely,” said Eric Winograd, senior US economist at AllianceBernstein, and “even then, he emphasised that if there are additional cuts it would likely be a brief cycle”.
Although equity markets dropped sharply during Mr Powell’s press conference, they did recover some ground after he indicated that the Fed did not intend to stop at “just one” interest rate cut.
If there is a benefit of Wednesday’s market whipsaw to the Fed chair, it is that the central bank may have wiggled out of a preset easing path that it was not entirely comfortable with.
“Today’s Fed events may have given risk markets a little indigestion, but they also bought the Fed a little more flexibility going into the next FOMC meeting,” wrote Michael Feroli, an economist at JPMorgan. “While today’s move was motivated by global growth, trade policy and inflation developments, we expect September’s decision will also depend on domestic growth developments.”
A clear-cut decision for the Fed may not be simple even then. Trade negotiations between the US and China have resumed, with a new round expected in September, but with expectations of limited progress towards a lasting peace. Economic data have shown a split between strong consumption and employment on one side, and weak investment and manufacturing figures, which may not be resolved one way or the other.
Financial conditions already loosened
In his press conference, Mr Powell did suggest that Fed policy had already been successful in that the expectations of a rate cut had led to better financial conditions, helping support the economy. But the danger now for the Fed is that by dimming expectations of future rate cuts, it could trigger the opposite dynamic.
Some economists are adjusting to the likelihood of a more gradual, cautious Fed easing by predicting a delay and slowing in the pace of interest rate cuts, rather than a walkback or a pause.
But on Wall Street, there was disappointment that a new era of easier money that markets had encouraged and warmed to in recent months was not a done deal.
“The whole purpose of the cut was to signal that they are aware of what was going on in the world and act on a pre-emptive basis,” said Krishna Memani, vice-chairman of investments for Invesco. “While I fully understand the desire to set market expectations, he had many more opportunities down the road to do so.
“You can always count on Jay Powell to mess up a good thing.”