The Calculus for Fed Inaction is Getting Tougher by the Day
Over the last few days investors have been given a good amount of information to digest from incoming economic data, Federal Reserve meting minutes, and Fed speakers opining about monetary policy at the annual Jackson Hole conference. Even still, everyone is waiting on THE speech from Fed Chairman Powell tomorrow to set to the expectations for the Fed’s upcoming meeting in mid-September. It’s clear from both the Fed meeting minutes as well as recent comments by Fed officials that there is no consensus for additional easing in September, let alone a 50 basis point cut in rates. Indeed, below are excerpts from three Fed speakers over the last few days, all suggesting no keen desire for more rate cuts.
Fed Rosengren: “We’re likely to have a second half of the year that’s much closer to 2% growth…I’m not saying there are not circumstances in which I’d be willing to ease. I just want to see evidence we are going into something that is more a slowdown.”
Fed Harker: “We’re roughly where neutral is. It’s hard to know exactly where neutral is, but I think we’re roughly where neutral is right now. And I think we should stay here for a while and see how things play out.”
Fed George: “We’re at a sort of equilibrium right now and I’d be happy to leave rates here absent seeing either some weakness or some strengthening, some kind of upside risk that would cause me to think rates should be somewhere else…I don’t yet see the signal that suggests it is time to get worried about a downturn…[a rate cut] is not required in my view.”
The market, on the other hand, continues to price in a 100% probability of easing in September, a two in three chance of more easing still at the October meeting, and a better than even chance of a third cut by January, 2020. Clearly there is a disconnect – a disconnect that in our view is getting harder and harder for the Fed to justify based on incoming data.