Powell: Cut, No Cut or Unsure and Watching the Data?

I will be surprised if Powell tips his hand when pressed about the direction of interest rates. I don’t think there is any concrete rationale to do so, and if he hints at a cut because the market anticipates a cut, then he’s going to have a credibility problem down the road.
James Hyerczyk
Federal Reserve Powell

Fed speakers were at the forefront on Tuesday, but they didn’t say much to influence the price action in the financial markets. That left the light shining on Federal Reserve Chairman Jerome Powell ahead of the start of his two-day Congressional testimony on Wednesday.

Fedspeak Recap

On Tuesday morning, Powell presented opening remarks at the Federal Reserve Bank of Boston. Powell kept quiet on monetary policy, but he did make comments on bank stress testing. Powell emphasized the “need to evolve in the years ahead to keep pace with the ever-changing financial system,” and to make sure that the banks will remain able “even in a severe downturn, to provide the credit that households and businesses depend on.”

Bostic: Policymakers Debating Merits, Risks of “Hotter” Economy

Late Tuesday, Atlanta Fed bank president Raphael Bostic toed the company line by saying the central bank was debating the risks and benefits of letting the U.S. economy run “a little hotter,” balancing the good it could do for workers against the possibility it could end in a recession.

“We do not think about this in terms of our tools and how comfortable we should be letting the economy run a little hotter,” Bostic said in an event at the Washington University in St. Louis.

Powell:  What to Do? What to Do?

Essentially, we all want to hear his thoughts on the strength of the U.S. economy and whether the Fed is leaning toward a rate cut. Financial market investors also want clarity from the Fed chief:  cut, no cut, or still unsure and watching the data. He cannot continue to be ambiguous.

Diane Swonk, chief economist at Grant Thornton says, “He will affirm the economy remains solid, if not spectacular. What matters most is what he sees as headwinds and how he characterizes those risks. They are driving the desire to do an insurance cut.”

RBC Capital Market’s Tom Porcelli says, “We do not believe there is justification to cut rates at this juncture. And we would like nothing more than Powell to express that view during Wednesday’s congressional testimony.

It’s About Credibility

On July 2, I published the following on FXEmpire.com,

“Keep This in Mind”

“Given Powell’s comments, it looks as if the game-changer could be Friday’s U.S. Non-Farm Payrolls report. If this report comes in better than expected then combined with the resumption of trade talks and the steady PMI data, I think investors will have to seriously consider the possibility of no rate cut in July.”

“We’ll know what the markets are thinking by watching Treasury yields. It’s not too early to develop a strategy to capture the most from this potential shift in investor sentiment. For one, yields will likely spike higher as well as the U.S. Dollar. Gold prices will plunge and stocks could erase some of the premium built into the market in anticipation of a rate cut.”

“It all comes down to the need for insurance against a slowdown in the expansion.”

I will be surprised if Powell tips his hand when pressed about the direction of interest rates. I don’t think there is any concrete rationale to do so, and if he hints at a cut because the market anticipates a cut, then he’s going to have a credibility problem down the road.

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