Economy Still in a Good Place, and Now Policy Is, Too

Both the statement and press conference essentially removed the signal of a bias toward easing. The  Committee convened a transition from (i) consecutive cuts because of risk management to (ii) an it-depends mode where the presumption is no cut in December and it will take “material” surprises in the data to move the Committee to cut again. 

Markets seem to find this to be a reasonable perspective and are pricing in an only-modest probability of a  December cut. The Committee must be pretty happy to be in a place where it is not pushed by the markets and has successfully bought some optionality, not just insurance. 

A December cut now looks unlikely, based on Powell’s remarks. While he wouldn’t get into what specifically would lead them to ease in December, he seemed to set a pretty high bar. Indeed, if enough goes wrong by  December to qualify as “material,” then the FOMC may well be considering a cut that is larger than 25 basis points. Overall, today’s FOMC meeting reinforces our call for no further cuts in our baseline outlook. 

The Statement 

The spirit of the October FOMC statement, if not the exact wording, was as expected. 

The big change was to the last sentence of the second paragraph, most importantly removing the “active”  word “act” and moving to much more passive language: 

Current version 

The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate. 

Previous version 

As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. 

The fact that they reworded this guidance even slightly signals that they are feeling differently coming out of this meeting than previous ones. And they chose to reword this guidance to be entirely neutral: Gone is “act  as appropriate to sustain the expansion.” Before it was monitoring, ready to act; now it’s monitoring, but with a clear inclination to remain where it is unless they see more substantial changes. 

This morning’s GDP report for Q3 spared the FOMC the need to make any significant changes to the first paragraph. In particular, the solid prints for real GDP, consumer spending, and residential investment allowed  them to continue to say that “economic activity has been rising at a moderate rate” and that “household  spending has been rising at a strong pace.” The only change was to say that business fixed investment and  exports “remain weak” rather than “have weakened.” 

Only Presidents Rosengren and George dissented. No surprise there. President Bullard did not dissent again,  which suggests he believes the cumulative easing of 75 basis points is enough at this juncture. 

Press Conference 

Powell was consistent with the statement but took the message a step further. Near the beginning of his opening remarks, he said: “the policy adjustments we have made since last year are providing and will continue to provide meaningful support to the economy. We believe that monetary policy is in a good place.”  Now, not only is the economy in a good place, “monetary policy is in a good place” as well. 

What would it take for a change in monetary policy? A “material reassessment” of the outlook, in this case,  a large downside surprise. Of course, the Committee doesn’t project surprises! Couldn’t be clearer or more explicit than that. Over and over Powell used the word “material” to describe the degree of change in the outlook that would warrant easing policy. For example, he said: “[If] developments emerge that cause a  material reassessment of our outlook, we would respond accordingly.” But, if the incoming data are “broadly  consistent” with the current outlook, the present stance of policy is “likely to remain appropriate.” The  December meeting is not very far off at this point, and the FOMC rarely sees a materially different outlook from one meeting to the next. The FOMC is not looking for a reason to ease; it will take a push. 

Powell was asked about low inflation and inflation expectations, and he didn’t provide any indication that the  FOMC is thinking about easing in the near term because of the inflation outlook. He emphasized the FOMC’s commitment to its inflation objective and to ensuring expectations are well-anchored. He also talked about the Committee’s framework review. As for a policy response, he spoke only in general terms: “It comes down to using your policy tools to achieve 2% inflation and that’s the thing that must happen for credibility in that area. 

Powell was quite pleased with the economy’s performance, saying, “overall we see the economy as having  been resilient to the winds that have been blowing this year.” He emphasized the ability of strong household spending to be sustained and compensate for “continuing” weakness in areas including trade and investment.  When asked about the prospect of weak investment leading to job cuts and potentially undermining the  household sector, he said, “that’s a risk that we have been monitoring, but we don’t see it.” He noted that 

“we don’t see rising initial claims.” 

Powell noted that they “see the risks to the outlook as perhaps having moved in a positive direction over the  course of this intervening period.” He later clarified that he was largely referring to a perception that certain tail risks had diminished. In particular, the U.S.-China trade dispute seemed to have moved “away from bad outcomes and confrontational outcomes” and the risk of a no-deal Brexit seemed to have lessened. Still, he  said, “in both situations, there is plenty of risks left.” 

Powell also made some remarks at various points in his press conference that reinforced our belief that the  FOMC is highly unlikely to “take back” these cuts. Accordingly, this reinforced our skepticism of the hikes shown in the median dots from September. Powell was asked about this very directly when a reporter drew a parallel with so-called “insurance cuts” in the 1990s that were soon reversed. He said to forget about that comparison. Powell noted that the “current” stance of policy is appropriate and said it “will remain so as long  as the outlook is keeping with the expectations.” At another point, he was asked how he would characterize the current stance of policy, given where estimates of the longer-run fund’s rate are. He said he would probably describe it as “somewhat accommodative policy” but that there is a range of estimates of neutral and that these have generally moved down. In any case, normalizing policy (whatever that would mean) is not on his mind. Finally, he was asked about the potential for rate hikes because of developments such as a reduction in trade uncertainty or firming inflation. He indicated they would welcome the former but would wait to see the effects on economic activity. As for the latter, “I think we would need to see a really significant move up  in inflation that’s persistent before we even consider raising rates to address inflation concerns.”

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