With all eyes on today’s testimony, watching for strawman hawkishness ahead of the FOMC meeting, Fed chair Powell’s prepared remarks offer some signal that he is in fact just as dovish.
Powell TL/DR: The economic news is terrible enough to send the S&P back over 3,000
Powell begins by noting that uncertainties since June’s FOMC continue to dim their outlook, which is odd because macro data has surprised to the upside since then…
Powell’s key comments, via Bloomberg:
- Baseline case is still for solid growth and for labor market to stay strong but notes uncertainties have increased in recent months
- Notes many officials at June FOMC saw stronger case for somewhat easier monetary policy
- Powell points to risk weak inflation may prove more persistent, says inflation pressures remain muted
- Says housing investment and manufacturing look to have dipped again in 2q
Powell also notes that “growth in business investment seems to have slowed notably” … which is great news as investment in stock buybacks has accelerated notably.
Furthermore, the broader economy has continued to deteriorated, and as Bloomberg’s James Callan writes, “many FOMC participants saw the case for a rate cut at the June meeting. Since then, uncertainties have not receded and inflation has remained low, sealing the deal for a July interest-rate cut.”
The punchline is that Powell warns that “a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate.”
Ahead of the release, July rate-cut odds had slid to 92.5% from 100% (with zero percent chance now of a 50bps cut).
As Bloomberg’s Fed watcher Steve Matthews writes, Powell’s remarks suggest he is comfortable with market pricing of an interest rate cut at the end of July. This was an opportunity to push back against those expectations if he wanted to, and he did just the opposite.
He noted that the FOMC had committed to “closely monitor” data and “act as appropriate” to sustain the expansion, adding that many participants believed the case for accommodation had increased. He went further by saying that “since then,” based on data, “it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”
As Matthews concludes, correctly according to the Fed Funds markets, “Powell didn’t say so explicitly, but it’s hard to read this other than he thinks a cut in July would be appropriate.”
And in a tangent, now that Powell confirms he will do anything that Trump wants him to do, Bloomberg’s Craig Torres writes that “Powell’s testimony had an overt political message” and explains:
At a time when the dual mandate is being diminished by Trump advisers Larry Kudlow and Judy Shelton (a pick for a governor’s seat), the Fed chair embraced it. He also used the word independence twice in the second paragraph, noted that unemployment can’t be captured in a single statistic and gave Congress a long list of things they have to think about, things that monetary policy can’t solve.
Said otherwise, “please don’t replace me with Mario Draghi, Mr. President”
BMO’s Ian Lyngen summarized it best: “Well…That was dovish. The Chair just confirmed that things have gotten worse.”
Translation: Time to buy everything at all time highs, on margin.
Powell full testimony to the House Financial Services Committee, will be delivered at 10 am in Washington
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Full Prepared Remarks below (link to statement)