Via Wolf Street

“It is not the beginning of a long series of rate cuts”: Powell.

After seven months of intense pressure by the White House, Wall Street, and the entire media establishment, eight voting members of the FOMC voted to lower the Fed’s target for the federal funds rate by one quarter percentage point to a range between 2.0% and 2.25%. But two members – Kansas City Fed President Esther George and Boston Fed President Eric Rosengren – defied those pressures and voted to maintain the current target.

No FOMC member voted for a half-point cut.

The statement and Fed Chair Jerome Powell failed to provide assurances that there would be more rate cuts. In addition, Powell explained that “it is not the beginning of a long series of rate cuts” and then, confusingly, he threw in mentions of rate hikes.

The FOMC also voted to end the taper of its Quantitative Tightening two months earlier than previously announced, namely tomorrow.

But it wants to get rid of its Mortgage-Backed Securities. It announced that it would continue to shed up to $20 billion a month in MBS, and replace them with Treasury securities, including significant quantities of short-term Treasury bills, starting tomorrow.

Powell gave three reasons for the rate cut. They were outside the classic reasons for cutting rates. Normally rate cuts happen because the economy is getting into trouble. But he emphasized that’s not the case this time.

“The outlook for the U.S. economy remains favorable,” he said. “Consumption supported by rising incomes and high household confidence is the main engine driving the economy forward,” he said. Manufacturing and business investment are weak, but consumers are 70% of the economy, he said.

The three reasons for a cut — despite a relatively strong economy and markets near record highs – are, according to Powell: to provide “a bit of an insurance” against the “downside risks” to the US economy from weak global growth and trade tensions; to “help offset the effects” of these factors, and “to promote” the speed with which the dollar is losing purchasing power.

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But Powell refused to point at further rate cuts and confusingly threw the idea of rate hikes into the mix.

The Fed will be doing a lot of “contemplating” of where to take rates, and it will be doing a lot of “monitoring” of incoming information, he said. It will be “looking carefully” at global growth, and it “will see whether growth is picking up, whether it is bottoming out,” and it “will see on trade.”

Powell referred to this hike as a “mid-cycle” adjustment, such as in the past, when the FOMC cut rates in the middle of a cycle only to raise them again later. “I am contrasting it there with the beginning of a lengthy cutting cycle,” he said.

“It is not the beginning of a long series of rate cuts,” he said and added, “I did not say it was just one.” He explained:

“When you think about rate-cutting cycles, they go on for a long time. The Committee is not seeing us in that place. You would do that if you saw real economic weakness and you thought the federal funds rate needed to be cut a lot. That is not what we’re seeing.

“What we’re seeing is it’s appropriate to adjust policy to a somewhat more accommodative stance overtime, and that is how we’re looking at it.

“It is not a long rate-cutting cycle. That is what we do when there is a recession or long downturn. That is what I’m ruling out.

“When you look at other mid-cycle adjustments — I don’t know if they will be comparable or not — but you will see examples of these.”

And later he threw in rate-hike confusion:

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“One of the purposes of our cut today is to support the expansion. And if it works really well and the economy gets going again” – he referred to prior rate cycles though he wasn’t “predicting” it – “the Fed raised rates after a mid-cycle adjustment.”

When challenged by a reporter that the Fed, at the next recession, won’t be able to cut as much after the current rate cut and will have less ammo, Powell said:

“But you’re assuming we would never raise rates again, that once we cut the rates they will never go back up. As a matter of principle, I don’t think that is right.

“Long US business cycles have sometimes evolved to this event where the Fed will stop hiking, and in fact cut, and go back to hiking.

“I don’t know if it will happen here. It doesn’t seem like something that is particularly likely. We don’t know that. I think by extending the cycle, you do have a lot of benefits from that, and I think we will use the tools we have – a couple of rate hikes one way or the other is not going to matter so much.”

The wisdom of a rate cut under current conditions has been come under doubt recently – not just by yours truly from day one, but also by, among others, former New York Fed President Bill Dudley, who wrote yesterday: “Even a quarter-point cut – which is what I expect – entails significant risks. What if, in hindsight, it proves to have been a mistake?”

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There’s a risk “of needlessly stimulating the economy when it is already growing at an above-trend rate and pushing bond and stock prices to new and perhaps unsustainable heights,” Dudley wrote, adding:

“By focusing on downside threats such as the uncertainties of U.S. trade policy and foreign growth, the Fed might ultimately go too far. After all, the current level of short-term rates is already stimulative. If the economy maintains its momentum and inflation accelerates, the central bank could be forced to tighten again – an abrupt about-face that could burst a financial bubble of the Fed’s own creation, increasing the chances of a painful recession.”

Yup, stock markets were shocked and appalled by two dissenting votes, the lack of even a single vote for a 50-basis point cut, the total absence of indications of more cuts, and the sudden re-emergence of the suggestion, even as an aside, of a “couple of rate hikes.”  The Dow fell 333 points, the S&P 500 33 points, and the Nasdaq nearly 100 points – all down between 1.1% and 1.2%.

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