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James Hyerczyk
Federal Reserve Policy

Federal Open Market Committee (FOMC) members dominated the news last week along with Federal Reserve Chairman Jerome Powell. Some offered great insight into future central bank policy moves. Some hinted at what they consider to be the key factors that will influence the Fed policymakers when they meet on July 30 – 31, and even one fueled a dramatic move in the four major asset classes – Treasurys, the dollar, gold and equities.

In addition to the Fed speakers, the central bank also released stronger-than-expected reports on New York and Philadelphia Federal Reserve District manufacturing.

Interpreting last week’s comments, I’ve determined that fear of the unknown is driving the Fed at this time. The data hasn’t been showing what the Fed may be seeing. Remember that there are leading, lagging and coincidental indicators.

The Fed is leaning toward the 25-basis point rate cut because it sees uncertainty being fueled by the trade dispute between the United States and China. However, the recently released stronger-than-expected consumer inflation, retail sales and jobs reports mean the Fed still has time, so a small-rate cut will buy them a little time to continue to monitor the strength of the economy.

The Fed has also learned from the events in 2008 that led to the Great Recession – “where there’s smoke, there’s fire.”

Fed’s Powell Recognizes the New Norm

In the pre-2008 world, given current economic conditions, the Fed would be raising rates and tightening monetary policy. However, the Fed recognizes that tightening would be dangerous for the weakening global economy. This is why it stopped raising rates last December.

So let’s just say the Fed has been concerned about the weakening global economy and its impact on the U.S. economy for at least seven months, and the impact of rising U.S. rates on the global economy.  And now it feels that it must make a pre-emptive strike to continue the 10-year expansion. And this pre-emptive strike will be a simple quarter-point rate cut.

Last Tuesday, during a speech in Paris, titled, “Monetary Policy in the Post-Crisis Era”, Fed Chair Powell confirmed this new approach.

“The world in which policymakers are now operating is discretely different in important ways from the one before the Great Recession,” he said.

Powell added, “I should also note, as is fitting given this event and this audience, that since the crisis policymakers are even more keenly aware of the relevance of global factors to our policies. The global nature of the financial crisis and the channels through which it spread sharply highlight the interconnectedness of our economic, financial, and policy environments. U.S. economic developments affect the rest of the world, and the reverse is also true.”

“In addition, we have seen how monetary policy in one country can influence economic and financial conditions in others through financial markets, trade, and confidence channels. Pursuing our domestic mandates in this new world requires that we understand the anticipated effects of these interconnections and incorporate them into our policy decisionmaking.”

“Trend inflation, productivity, and interest rates were declining well before the crisis. But, for monetary policymakers in that era, the threat of high inflation felt proximate, the hard-fought battle to control high inflation having been just recently won.”

Powell may be seeing trend inflation, productivity and interest rates declining now and feels the time is right to take action.


New York Fed’s Williams Reveals Fed Playbook

On Thursday, New York Fed President John Williams revealed the Fed’s playbook to an overanxious market that was looking for any tradable comments from central bank officials.

Williams said that in a low-interest rate environment, it’s better to act quickly when there are signs of trouble. Is this really new? After all, good traders know that if there is such a thing as a good loss, the fast loss is the best. In other words, get out when you’re wrong.

“First, take swift action when faced with adverse economic conditions,” Williams said at a conference. “Second, keep interest rates lower for longer. And third, adapt monetary policy strategies to succeed in the context” of interest rates that are persistently near zero.


Powell and Williams are on the same page. They both see the need for a rate cut at the end of July, and they both feel the Fed has to act quickly to support and attempt to steer the economy in the right direction. Their comments last week also indicate that they are both willing to override the models. In doing so, however, there is always the possibility the move leads to a “melt-up” or a “bubble” in the stock market. We won’t know if it will until the Fed decides to start tightening again.

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