Yesterday's FOMC statement prompted a market response that was highly unusual - stocks sold off and closed on the lows of the day - and the narrative was clearly set: Powell was hawkish.
In fact, as former fund manager Richard Breslow notes, "everything I read about the FOMC’s latest decision is some version of hawkish. Variations on the theme run from, it was a surprise to, we told you so. From renewed discussion of just how high the neutral rate really is to impending policy mistake. From gratification that the economic outlook was upgraded to allow them to pull potential rate hikes sooner to outrage for the callous disregard for emerging markets."
That’s an awful lot of emotion for a decision that you would be hard-pressed to find on anything but the shortest charts.
Breslow's views are clear, as he details below: "To my mind, this changes nothing."
The dots, which are a bad construct to begin with, fit more closely with what the Chairman has been saying all along. And end up in the same place as before. Hardly earth-shattering. But what he didn’t say, seems to be getting the most attention. I’d ask what was realistically expected, but I know.
This isn’t suddenly a Fed oblivious to what is going on around it. But it is one that won’t throw itself lightly into the geopolitical fray without extreme caution. Especially while the issues are so raw. They are aware that trade tensions and tariffs are a threat. They also know, it hasn’t shown up in the numbers they are tasked with focusing on. The Chairman isn’t likely to decide this is the time to go toe-to-toe with the President who just appointed him. And still has the luggage tags on his carry-all from his Canada visit.
But what about emerging markets and their dollar-denominated debt load? What about it? He didn’t underwrite the offerings and can’t be seen as having been taken hostage by those who chose to sell the bonds. And let’s be honest, at this point the much fretted EM debacle has been remarkably localized, if sometimes dramatic. One might argue that the blame for this potential problem lies in the punch-bowl not having been taken away much sooner.
Should he have expressed caution with the prospect of other central banks reducing liquidity at the same time? The Committee is hardly going to throw themselves into the Governing Council’s debate. The conversation that won’t ever happen is where he tells the ECB that if they allow the Bundesbank to push them around, the Fed will take on the responsibility to do whatever it takes.
I’m not sure what more he could have said about the yield curve. At this point it remains a subject where reasonable people can differ. And they do. He just isn’t expecting an onset recession. If he did, he wouldn’t be doing exactly what he is doing.
For my money, I want to know how the economy looks to him right now and what his current thinking is on the next two live meetings. Everything beyond that is just going to have to roll with the punches.
And hope the Chairman doesn’t have to utter the same immortal line that Otter did to Flounder in Animal House. Because at this point, I do trust him