The Federal Reserve released minutes from the December Federal Open Market Committee meeting on Wednesday and it looks like the “Powell Put” might be in.
The minutes revealed a much more dovish sounding Fed as we move into 2019. Members of the FOMC indicated they could be “patient” with future rate hikes and said the future path of the central bank’s monetary policy is “less clear.”
What is clear is that Powell and company seem to be getting cold feet when it comes to continuing on an aggressive tightening policy. The question is why?
According to Reuters, the minutes revealed that “a number of” policymakers said that before raising interest rates again, it was important for the central to take stock of risks that had become “more pronounced in recent months.” In fact, a few FOMC members were apparently arguing for a pause in rate increases.
On the other hand, Fed members still seem optimistic about the US economy. The minutes indicated members generally think “the economy had been evolving about as they had anticipated.” They view the labor market as “strong.” FOMC members project continued economic growth and say inflation remains relatively “muted.”
Yet, the central bank appears to be waffling when it comes to normalizing rates. What gives?
A recent talk by Federal Reserve Chair Jerome Powell in Atlanta reflected the sudden dovish turn. Peter called the comments “tailor-made” for the stock market — and this may well reveal why the Fed has gone wobbly on rate hikes.
“It’s almost as if he brushed up his script, somebody took him behind the barn and got his mind right, and he came out as an uber-dove. All he talked about was why the Fed is going to be patient. Patient now is back – patient in raising rates. The Fed is not worried about inflation. The Fed is not worried specifically about rising wages, about the low unemployment rate. None of this stuff, which would have concerned the Fed a few months ago, all of a sudden the Fed is not worried at all about any inflationary pressures in the market, about wage growth. Everything is fine.”
Powell also walked back statements he made last month about quantitative tightening being on “autopilot,” saying the Federal Reserve would not “hesitate to make a change” to its balance-sheet reduction plan if data showed that it was harming economic growth.
“Basically, that’s what the market wanted to hear and that is what caused a rally to move into a higher gear and you saw the big rise in the stock market.”
I think Peter hit the nail on the head. Powell and company are telling the markets what they want to hear. The Powell Put is in. He wants to rescue the stock market. The hope is that a little dovish talk will ease investors’ concern and stabilize the markets.
Peter was actually talking about this last summer. Even before the stock market started to tank, Peter was saying that eventually, the Fed was going to have to give. This was back in August when everybody was focused on problems in emerging markets.
“And the main reason that everybody believes the US dollar is going to continue to strengthen is because they believe the Fed is going to keep raising rates and shrinking its balance sheet. So, the longer the Fed is going to keep up the pretense that it’s going to raise rates and shrink its balance sheet, then it continues to put pressure on emerging markets and it continues to put pressure on the housing markets. So, ultimately, the Federal Reserve is going to have to give, and what the markets are going to have to start anticipating is the end of the cycle. Because even though the Fed is still talking about removing the monetary combination, there’s not much left that they can remove without the whole thing comes toppling down. In fact, the evidence is already there that the economy is weak, despite the refusal of the markets to acknowledge that. And clearly, Donald Trump wants to continue to pretend that the economy is strong.”
Fast forward to today. The stock market bubble has popped. There is even more pressure on the Fed to ease up on rate hikes. In fact, President Trump has been verballing hammering the Fed for months. The central bankers can talk about their political independence until they’re blue in the face. We all know that’s a myth. Powell has to feel that pressure. It would certainly account for the sudden dovish turn we see at the Fed.
Here’s the bottom line: even though Powell and company still think the economy is strong (It isn’t) and that should support continued monetary tightening, they believe propping up the stock market is a bigger priority. This paragraph from the minutes makes that pretty clear:
“After taking into account incoming economic data, information from business contacts, and the tightening of financial conditions, participants generally revised down their individual assessments of the appropriate path for monetary policy and indicated either no material change or only a modest downward revision in their assessment of the economic outlook.”
The only thing that’s actually changed in the minds of FOMC members is conditions on Wall Street. But that matters.
So, the Powell Put is in.
Now, what’s going to happen when the central bankers actually figure out that the economy is about to follow the stock market into the valley?