Why does Powell think the Fed needs to cut rates? For me it’s curious. Itchy (trigger) finger maybe? What’s he so worried about? I was surprised by his (continued) dovish rhetoric and contradiction(s) last meeting. For example, on the one hand, growth is accelerating, inflation is falling and we have a strong labor market. Great! But we still need to cut rates and taper QT (soon!). I must be missing something – it’s hard to understand why the Fed is so keen to pull the trigger… what do they see we don’t?
"Interest Rates / Bonds"
The Real Surprise with Powell’s (Dovish) Statement
Investors were on tenterhooks going into today’s Fed interest rate decision. Markets were up sharply the past few weeks – expecting Powell to remain dovish. However two consecutive months of hotter-than-expected inflation prints had some thinking twice. Turns out Powell is a dove. However, he delivered more dovish ‘fuel’ for stocks that what many expected.
Will Powell Heed Volcker’s Wisdom?
Next week Fed Chair Jay Powell will deliver the FOMC’s March statement on monetary policy. Interest rates are not expected to change – however his sentiment might. When we last heard from Powell – he was dovish – igniting a rally in risk assets. However, with inflation heating up and a tight job market – Powell may perform another pivot. Markets expect three rate cuts this year – those expectations might be dialed back to just two.
It’s Not If “Long & Variable Lags” Hit… It’s When
Milton Friedman coined the expression “monetary policy operates with long and variable lags”. In the 1970s – he felt it was up to around two years before those effects are felt. Today it’s believed to be sooner – given open transparency of Fed speak and data tools available. But is it? It’s been two years since the Fed’s first hike and we’re just starting to see labor markets soften and consumer demand weaken. Have the full effects of tighter policy been absorbed? I don’t think so.
For a full list of posts from 2017…