1. Before yesterday: markets at ⅓ chance of 50bp cut in July, ⅔ chance of 25bp cut; we were at 25bp. 2. Yesterday afternoon: Williams and Clarida spoke right before the start of blackout; markets moved to ⅔ chance of 50bp, ⅓ chance of 25bp; we moved our call to 50bp.
3. Yesterday evening: NY Fed says Williams didn’t mean to signal about a July move; markets now see little chance of 50bp (even less than before Clarida and Williams spoke).
For our part, we are moving our modal call for the July meeting back to what it was: a cut of 25bp.
We initially viewed the interview by Clarida and speech by Williams yesterday as a coordinated effort to send a signal before the blackout. As we wrote yesterday in our change in the call, we read Clarida’s interview and Williams’ comments as more dovish than earlier communications by them or the Chair and signaling a greater chance of a 50bp cut. But that interpretation was as much about the context of their remarks as the content: Two of the leading members of the Committee talking the same day, right before the blackout, at a time when markets already saw a July cut as a certainty.
Markets certainly picked up on their remarks as a dovish signal, and, given that there was so little time before the blackout period for communications, we saw very little prospect of policymakers talking back down the prospects of a larger cut. But they did. We got a communication from Williams (via NY Fed PR staff) effectively saying to ignore his speech, that he did not intend to send a signal of a 50bp cut. And the market took that message to heart. So those two developments encouraged us to rethink our call.
At the end of the day, we now expect a 25bp cut with virtual certainty. And the market concurs. Indeed, a 25bp cut is seen as even more likely than before Williams and Clarida spoke.
Clarida and Williams bear some culpability since they did decisively move the market, likely inadvertently, to anticipating a 50bp cut. Larry notes that, if he had moved the market like that, Greenspan would have had his head!!!