If the goal of Federal Reserve Chair Jerome Powell and his colleagues on the Federal Open Market Committee was to inspire confidence in investors, businesses and consumers to sustain economic expansion, they seem to have failed miserably.
Stocks were plummeting even while Powell held forth with his contradictory and confusing comments as investors were the first to express their displeasure with the Fed’s failure to commit to monetary stimulus to keep the economy growing.
The Dow Jones Industrial Average closed down 333.75 points, or 1.23%, while the S&P 500 was down 1.09%.
Dismal Performance
Investors reacted not so much to the quarter-point cut in the benchmark federal funds rate, which had been clearly telegraphed, or even to stopping the runoff of the Fed’s bond portfolio on Thursday, two months ahead of time, which was just icing on the cake.
What they reacted to was the mealy-mouthed performance of Powell during the press conference, which was dismal even by the low standards he has set.
When asked repeatedly whether a quarter point cut was sufficient to achieve all the goals the Fed wanted – sustain growth, promote employment, spur inflation, take out some insurance against downside risk from trade tensions and a global slowdown – Powell insisted that it wasn’t about these 25 basis points but about the trajectory of Fed policy.
He tried to make the Fed’s abrupt reversal from tightening to loosening look like a thoughtful evolution of policy. The trajectory, moving from hiking rates to patience about standing pat to now lowering them, suggested that we are now in a downward trend, he hinted.
But then he proceeded to undermine his own comments by portraying the cut as a mild “mid-cycle adjustment,” not necessarily the prelude to series of cuts as if the Fed was coping with a recession.
Powell’s Tin Ear
Where is the distinction, really, between trying to head off a recession the inverted yield curve has signaled and coping with a recession? If there is one, investors weren’t buying it. Analysts immediately commented that this probably marks the peak of the stock market.
It’s not only that Powell has a tin ear for markets – which he has consistently shown – it’s as if the FOMC as a whole has no idea of what kind of feedback loop exists between its policies and the economy.
The positive data it so cherishes as it obsessively looks backward is the result not of patience or pivots in policy, but of the expectations its forward guidance has created across all spectrums of demand. The data continues to be largely positive precisely because the Fed has raised hopes that it will adjust monetary accommodation to the realities of a late-cycle decline (not, after 10 years, mid-cycle!).
Hawks Vs Doves
So you have the spectacle of two FOMC voters – ur-hawk Elizabeth George from the Kansas City regional bank and Eric Rosengren of Boston, raging dove turned raging hawk – actually dissenting because they thought it would be better to keep the benchmark rate at 2.25-2.50 instead of cutting it to 2.00-2.25 as the committee decided.
Even doves like James Bullard of St. Louis, who dissented in June because he wanted a cut at that meeting, pontificated ahead of the meeting this week that a quarter-point was all that was needed. And he is the one who has led the re-thinking about how the natural rate of interest has declined and the Fed needs to adjust its policy framework.
Ill-Conceived Comments
While the European Central Bank is gasping for air and ready to push interest rates even further into negative territory and to re-start its asset purchase program; and while the Bank of England is contemplating rate cuts instead of hikes even though Britain has a real threat of inflation; and while the Bank of Japan, already under water, is forced to keep rates at the current level even as it vows to act quickly if events warrant, Powell and the other Fed policymakers indulge in the luxury of living in a different world than the one where all this taking place.
It is not the chairman’s job to try to smooth over dissent with compromises that fail to please anybody. It is his, or her, job to get it right, and once again Powell failed to do so and then exacerbated the situation with his ill-conceived comments.
Some are hopeful that the Fed will see from this reaction that it has to proceed with another cut in September, after all. But its slow-wittedness may have done permanent damage this time.