Off The Wire
Powell: Fed to act as appropriate to keep expansion going
(Reuters) - The U.S. economy is in a “favorable place” and the Federal Reserve will “act as appropriate” to keep the current economic expansion on track, Fed chair Jerome Powell said on Friday in remarks that gave few clues about whether the central bank will cut interest rates at its next meeting or not.
* Powell says U.S. economy is in a ‘favorable place,’ Fed will ‘act as appropriate’
* Powell says Fed is working to sustain economy that faces ‘significant risks’
* Powell says U.S. economy is close to both of Fed’s goals
* Powell says slowing global growth, trade policy uncertainty, muted inflation weigh on favorable outlook
* Powell says premise that healthy U.S. economy needed higher rates was generally borne out
* Powell says low inflation, not high inflation, is ‘problem of this era’
STOCKS: S&P 500 .SPX pares loss, last down 0.11%
BONDS: U.S. Treasury yields slipped; 2s US2YT=RR at 1.5538%; 10s US10YT=RR at 1.5723%; 2s/10s curve slightly steeper around 1.5 bps
FOREX: The U.S. dollar index .DXY pares slight gains, last up 0.08%
THOMAS COSTERG, SENIOR ECONOMIST, PICTET WEALTH MANAGEMENT, SWITZERLAND
“Powell was a bit more dovish than the regional Fed presidents. Since the last meeting, data has been mostly negative. He seems more worried about the global outlook and, second, he says he will act as appropriate which is a signal he wants to cut rates again in September. I expect one cut in September and a growing chance of a third cut in October. But for any more than that you will need a recession.”
JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON
“It was overall dollar neutral. The Fed is keeping its options open in the face of volatile trade policy. For now, the Fed appears on a path of modest rate adjustments. But if the global picture continues to darken, the Fed may need to resort to more meaningful rate reductions which would be dollar negative.”
PETER CECCHINI, CHIEF MARKET STRATEGIST AT CANTOR FITZGERALD IN NEW YORK
“I don’t think the speech went one way or the other. It’s pretty much out there that the Fed is considering the trade war as part of what it’s considering around the global growth backdrop. The speech might have reinforced it. He said we’re keeping an eye on those developments and perhaps the comment that some things have changed since the last meeting puts some emphasis on it.”
“He keeps making these analogies to the ‘95, ‘98 cuts with respect to the mid-cycle nature of the cut. Let’s also keep in mind that, that would potentially mean hikes ahead.”
“Whatever else comes out of Jackson Hole, we’ll have to wait and see. The whole notion that he’s maintaining flexibility - ‘we’ll act as appropriate’ - to me, that language is sort of a mistake. Central banks can’t prevent business cycles.”
“It doesn’t look like it changed the September probability for a rate cut at all. It’s also hard, because these things move around so much after a speech like this. I would say that the speech hasn’t changed expectations for a December rate cut either.”
KARL SCHAMOTTA, DIRECTOR OF GLOBAL MARKETS STRATEGY, CAMBRIDGE GLOBAL PAYMENTS, TORONTO
“He highlighted the fact that the Fed is navigating uncharted waters, saying that there are ‘no recent precedents to guide any policy response to the current situation.’ This suggests that the central bank is still developing its reaction function - and that markets should not apply deterministic policy rules to incoming data over the coming months.”
“Overall, markets will interpret this speech to mean that the ‘Powell Put’ remains intact. Divisions within the Fed’s rate-setting committee are unlikely to slow the pace of monetary easing if the economy continues to decelerate. More easing is expected, and odds on two more rate cuts this year are likely to remain largely intact.”
PHIL ORLANDO, CHIEF EQUITY MARKET STRATEGIST, FEDERATED INVESTORS, NEW YORK
“What Powell needed to do today was thread the needle with three conflicting themes. That you’ve got this concept of independence, the Fed is not kowtowing to the pressure that Trump is providing. Second, data dependence — does the data support additional easing? Or number three, insurance — that while things may be fine here, there is a bunch of stuff we are concerned about overseas: the ongoing China trade thing, Brexit, the Draghi transition, German recession, Japanese recession. With all of these concerns, shouldn’t we be cutting aggressively here to prop up the U.S. economy to better withstand what global economic headwinds we may be facing at some point in the future?
“He has to do a masterful job and I think he is going to do the best he can of saying all those themes but the reality is the decision is not going to be made for another three weeks. As we roll into September 18, we may see disappointing manufacturing, at least on the surface a disappointing flash on jobs and, again, inflation that from my perspective is not going to be demonstrating a 2% or more core PCE rate by the middle of September.”
“So the Fed ought to have enough economic ammunition to execute a quarter-point cut on September 18th. “
BUCKY HELLWIG, SENIOR VICE PRESIDENT, BB&T WEALTH MANAGEMENT, BIRMINGHAM, ALABAMA
“The market reacted positively to the acknowledgement that low inflation is a challenge, which is a given. But the Fed has always been an inflation fighter first, that’s a positive because it implies that it’s in their policy thinking and that would help avoid a misstep.”
“In terms of his favorable outlook on the economy, that’s a positive for the market. In their opinion, they’re not seeing a recession.”
“In terms of dealing with trade, he’s been walking the tightrope, not wanting to make a misstatement. The question is not directly related to monetary policy, so he doesn’t know what the endgame is.”
“The inverted yield curve is what scared a lot of people and while he wouldn’t make a commitment to normalize the yield curve he didn’t address concerns about the inversion. The market’s initial read of what he said may dissipate because he didn’t address the inversion in the context of a global slowdown and a slowdown in GDP rates here in our country.”
MINH TRANG, SENIOR FOREIGN EXCHANGE TRADER, SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA
“I don’t think there were any surprises. It’s consistent with the sentiment that you saw in the minutes.
“Powell’s comments basically reiterate a lot of what we have been discussing. That the economy is doing relatively well overall, but there are a lot of challenges and headwinds that are coming our way potentially. I think you could read that in the minutes of the last meeting. The rate cut was more or less an insurance cut to kind of forestall some of these potentially significant headwinds even though the economy is overall doing pretty solid.
“There is a disconnect between the expectations of the market and what the messaging from the Fed is. They haven’t really been in sync for a while now.”
NELA RICHARDSON, INVESTMENT STRATEGIST, EDWARD JONES, ST. LOUIS
“Markets might confuse chair Powell’s comments of today with Draghi’s comments of a few years ago and misinterpret ‘act as appropriate’ with ‘do whatever it takes’. And that’s the risk.”
“What I’ve read of the Powell speech has laid out a very dovish framework that may not be met, given what we are seeing in the economy, slight increases in inflation, stronger retail sales. The recent data, except for the manufacturing, don’t really support a strong, aggressive, do-whatever-it-takes monetary stance and yet that’s exactly what the markets are pricing in right now.”
GENNADIY GOLDBERG, INTEREST RATE STRATEGIST, TD SECURITIES, NEW YORK
“Powell’s kind of sticking to the tone. It sounds very much like the minutes, he’s presenting the same arguments, he’s speaking for the committee rather than just for himself, it sounds like, and not committing. The one interesting point is he did talk about all the risks that have happened since the July meeting, and that suggests that he is allowing the markets to price in a September move. That’s where the ‘act as appropriate’ language comes in. That tells us that a September cut is probably a go, not that the market was uncertain to begin with. The kind of disappointing part here is that Powell did not commit to easing rates further, given these global uncertainties. So they are going to be taking these cuts one at a time, rather than providing any kind of forward guidance.”
RICHARD FRANULOVICH, HEAD OF FX STRATEGY, WESTPAC, NEW YORK
“The headlines seem consistent with a central banker attentive to the risk and prepared to do more to support the expansion and do whatever it takes to underwrite a continuing recovery. I don’t think that’s particularly new or innovative. That’s what Powell has been saying for some time. And the reaction in the FX market is pretty muted.
“I don’t really know what the market was thinking would be delivered, but if you’re betting on another two or three cuts, you wouldn’t be dissuaded by this speech based on the headlines. It doesn’t look like he has leapfrogged expectations. I guess he’s cementing an easing bias and he’s prepared to do more as needed.”
SEAN SIMKO, HEAD OF GLOBAL INCOME MANAGEMENT, SEI INVESTMENTS, OAKS, PENNSYLVANIA
“The markets are not reacting too much right now. The message he is providing is that we will be vigilant and are watching everything that’s developing. The question is whether the market will be comfortable with them, to wait for them to assess the data points and then make judgments whether the rates need to be lower. The economy is growing but we are seeing some slowdown. He hasn’t taken the opportunity to remove expectations about a rate cut next month. The size of the next cut will depend on how the data come out and how the global economy evolves in the next couple of weeks. The message is that they really want to keep this economy going.
“The yield curve is saying the Fed is not doing enough, they are behind the curve. They want the Fed to do 50 basis points.
We continue to favor duration. With any backup in yields, we are looking to add exposure. That wall of worries will help flows into U.S. Treasuries. That will keep the 10-year yield in this 1.50-1.75% range, maybe even lower especially if any of those worries on the economy, trade and Brexit intensify.”
Compiled by Alden Bentley