In the world of central banking, the past few months have qualified as stormy.
While parsing statements from central bankers is more art than science, there are some specific things that the market likes to see. When it comes to the Federal Reserve, investors are looking for calm, measured statements that suggest the Fed won’t go too far in any one policy direction, an assurance that they are closely watching the market, and a stated willingness to adjust policies based on new data.
That is not what has happened of late, and the market has made their unhappiness known.
First, in October, Chair Jerome Powell said in a Q&A session interest rates were “a long way from neutral at this point,” suggesting the Fed would continue its pace of recent rate hikes.
That was followed by a speech at the New York Economic Club in November, in which he seemingly backed off those comments by saying interest rates “remain just below the broad range of estimates…that would be neutral for the economy.” The market keyed in on that “just below” phrase, taking it to mean that policy won’t be changing too drastically.
A December rate hike, the fourth of 2018, that increased the federal funds rate to 2.25-2.5 percent seemed to reinforce the Fed’s hawkishness. But Powell’s use of the term “automatic pilot” in his post-meeting statement regarding how the Fed is thinking about rates and lowering its balance sheet did very little to soothe investor confidence. (Hey, we said this was more art than science.)
How do we know this statement was partly to blame for December’s volatility? The Fed said so.
Then speaking at the American Economic Association in January, Powell clarified that there “is no preset path for policy.” That was a lead-in to the big pivot at the end of January, in which the Fed not only kept rates unchanged but removed much of its hawkish tone.
Oh, and all this has occurred against a backdrop of criticism of rising rates from President Trump, though that appears to have abated for now.
The market got continued clarity on that verdict on Wednesday with the release of January’s Fed Minutes. Even though they showed FOMC members were divided on future rate hikes, the prevailing interpretation among economists seems to be that expectations are stable, which the market loves to see.
Helping matters have been a series of relatively consistent public statements from Federal Reserve members. New York Fed President John Williams, Fed Governor Lael Brainard, Chicago Fed President Charles Evans, Boston Fed President Eric Rosengren, Fed Vice Chairman Richard Clarida, and Kansas City Fed President Esther L. George have all come out and preached patience and an overall dovish tone in the past six weeks. This steady message shows the market that Fed members appear to be on the same page, even when they disagree on rate policy.
Of course, all of that could change with future statements. Going forward, all eyes will be on Jerome Powell’s congressional testimony Feb. 26-27 and the next FOMC meeting March 19-20 to see if this trend continues.
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