Jay Powell’s press conference swerves muddy outlook on US rates
Fed chief upsets financial markets that have priced in significantly more easing
After weeks of market pressure and internal debate, Jay Powell, the Federal Reserve chairman, pulled the trigger on the US central bank’s first interest rate since the financial crisis. That was the easy part.
While Wednesday’s announcement of a 25 basis point cut was in line with market expectations, the press conference that followed showed how challenging Mr Powell will find guiding investors on what happens next.
When the Fed chairman said that the move was a “mid-cycle adjustment in policy” — not the start of a full-blown easing cycle, which would imply multiple and possibly deep rate cuts — investors were spooked.
“The press conference muddied the waters,” said Julia Coronado, an economist at Macropolicy Perspectives. “Even if the Fed’s own thinking hasn’t changed much, and the bar is still very low for another rate cut, the lack of clarity on the motivation and the baseline thinking and the triggers for action leave markets more confused.”
Mr Powell’s unwillingness to commit to deeper monetary easing with great force represented a contrast to the consistently dovish messages sent by Fed officials in the weeks leading up to the Fed meeting, in a series of speeches, congressional testimony, and media appearances.
Mr Powell and his colleagues had laid out the rationale for pre
ventive easing in great detail, as a way to tackle low inflation and interest rates around the world, and protect the US from weaker conditions in the world economy, including the impact of trade tensions. At one point two weeks ago, the dovish drumbeat had grown so loud that some investors were even betting that the Fed could act more aggressively, with an immediate cut of 50bp, with several more to follow before the end of the year.
Yet while the Federal Open Market Committee statement signalled that the Fed would “act as appropriate to sustain the expansion”, suggesting it still had a bias towards easing, Mr Powell’s remarks stressed that the central bank would look carefully at the data before making its next move — so much more stimulus could not be guaranteed.
Dissent on the FOMC
The dissent of two FOMC members — Esther George of the Kansas City Fed and Eric Rosengren of the Boston Fed — may have factored into the more cautious approach to easing described by Mr Powell. Both officials had signalled they wanted to see more evidence of a real hit to the US economy before approving interest rate cuts. No one dissented by calling for more dramatic easing.
“Chair Powell appeared very reluctant to suggest that additional rate cuts were likely,” said Eric Winograd, senior US economist at Alliancebernstein, and “even then, he emphasised that if there are additional cuts it would likely be a brief cycle”.
Although equity markets dropped sharply during Mr Powell’s press conference, they did recover some ground after he indicated that the Fed did not intend to stop at “just one” interest rate cut.