For six months now, folks said the Fed had made a “U-turn” and would cut rates at the “next” meeting, or in between meetings, and by 50 basis points, and cut, cut, cut, and would re-start QE. But none of it happened — and might not happen this year. Here’s why, in Powell’s words.
During the Q&A at the press conference following the FOMC meeting yesterday, Fed Chair Jerome Powell summarized strengths, weaknesses, and “crosscurrents” of the US economy, and the global economy, in just a few clear words and explained how the Fed is looking at these developments. Before the start of the Q&A, he concluded his opening remarks with this admonishment:
“Uncertainties surrounding the baseline outlook have clearly risen since our last meeting. It is important, however, that monetary policy not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook. Thus, my colleagues and I will be looking to see whether these uncertainties will continue to weigh on the outlook.”
And he added the standard Fed lingo, “And, we will use our tools as appropriate to sustain the expansion.”
A similar phrase was also used repeatedly during the rate-hike phase to explain that preventing an economy from overheating by raising rates would allow it continue expanding. So the phrase is not new. It explains Fed decisions in both directions. The concept of the phrase is embedded in the Fed’s dual mandate.
So here is what Powell said during the press conference, in response to a question about the economy:
“It’s a complicated picture. And the answer is we look at all of it. But I would say the big pieces of it are that the baseline outlook has been a good one, and that has basically been consumer spending coming back up in the second quarter.
“And consumer spending is at a healthy level, and that makes sense. You’ve got a tight labor market. You’ve got companies in surveys saying that labor is scarce. You’ve got workers in surveys saying that jobs are plentiful. You’ve got wages going up. You’ve got high levels of household confidence.
“So all of the underlying fundamentals for the consumer-spending part of the economy, which is 70% of the economy, is quite solid.
“Job creation if you take a three-month average is still well above the level of entry into the workforce. So that part of the economy is solid.
“You mentioned manufacturing, and we’re seeing this all around the world: manufacturing, investment, and trade have been weaker. It’s not solely a domestic issue.
“And it may be that there is a range of factors that contribute to that, including for example what China has done over the last couple of years in working to bring down its leverage. Some of it may be uncertainty over your supply chains due to trade developments. The Boeing 737 issues may be contributing in their own way. Lower oil prices are contributing to lower investment, although they’re also leading to lower gas prices, which supports spending.
“So there are many things. There isn’t any one thing that explains it all.”
“But you do see growth in services. So you see this pattern around the world of weak manufacturing, but growth in the far larger part of the services economy, which has led to low unemployment, good job creation, and rising wages.
“That’s kind of the two big pieces of it that you see.
“Then you see the crosscurrents.
“If you lay the crosscurrents on top of concerns about global growth and trade developments, you have the full picture. And I think what we took away from that picture is that we’d like to see more — that we do see these risks, and what we want to do is we want to watch and see whether they continue to weigh upon the outlook.”
The wildcard appears to be inflation, more so than the economy. Inflation as measured by the Fed’s yardstick (core PCE) was on target in the 2%-range for most of last year through December, but is now at 1.6% (after ticking up in the latest reading). In his opening remarks, which he echoed during the Q&A, Powell said (underscore added):
“Setting aside short-term fluctuations, Committee participants expressed concerns about the pace of inflation’s return to 2 percent. Wages are rising, as noted above, but not at a pace that would provide much upward impetus to inflation. Moreover, weaker global growth may continue to hold inflation down around the world.
“We are firmly committed to our symmetric 2 percent inflation objective, and we are well aware that inflation weakness that persists even in a healthy economy could precipitate a difficult-to-arrest downward drift in longer-run inflation expectations.”
The phrase I underlined is key: “Setting aside short-term fluctuations.” The Fed won’t react to short-term fluctuations, as Powell pointed out in the admonishment at the end of his opening remarks. Inflation data is volatile and jumps up and down. But a trigger for a rate cut would be a “sustained” period significantly below target – not a couple of months.
For six months now, ever since the FOMC had said that it would be “patient” about future rate hikes, folks have been saying that the Fed had made a “U-turn,” that it would cut rates at the “next” meeting, or even in between meetings, and it would cut by 50 basis points, and cut, cut, cut, and that it would end Quantitative Tightening (QT) and re-start QE.
So now the year is halfway over, and the Fed still hasn’t cut one iota, and QT is still going on, though at a slightly slower rate.
On NPR this morning, I heard an exasperated reporter saying that the Fed’s failure to cut rates yesterday had been a “disappointment,” but that “the Fed expects” to cut rates soon.
This phrasing reflects much of the coverage in the media. But compared to what Powell actually said during the press conference, it’s a misrepresentation. Who “expects” these rate cuts are the media and investors, not the Fed. The Fed is watching economic developments before making a decision. And despite some weak spots, there is a lot of strength left in the US economy where it matters the most, also reflected by the booming stock market and junk-bond market — that’s what Powell tried to convey.