“How do we know what you are going to do next and why, now?” asked CNBC economics reporter Steve Liesman, a few questions into Wednesday’s press conference with Federal Reserve Chairman Jerome Powell.
It was a question on a lot of people’s minds, and not one Powell provided a clear answer to. You could tell Powell’s answers were unclear from the way the stock market bounced up and down during the press conference. Stocks moved little when the Fed announced a quarter-point short-term interest rate cut in a written statement. But they tanked when Powell said at the press conference that this was not the start of a “lengthy” interest-rate-cutting cycle; they bounced back up when he clarified that didn’t mean there wouldn’t be some more rate cuts. By the end of the day, the Dow was down about 300 points, and investors had sharply tampered their expectations for interest-rate cuts for the rest of the year, though futures markets still indicate 50 percent odds of at least one more cut during 2019.
In fairness to Powell, he faces circumstances that make it difficult for him to be clear about the Fed’s intentions.
First of all, he and the other members of the Federal Open Market Committee can never know what they will do about interest rates in the future, because those decisions can and should be based on future data and events. He doesn’t know how the economy will do in the next three months, so he can’t say whether another interest rate cut will be appropriate in the next three months.
What Fed officials usually should be able to do is talk conditionally about the future: If the economy does these sorts of things, we will respond in these sorts of ways. But Trump has played a wild card. One of the key factors the Fed must respond to is the specific economic mess Trump creates when he upsets the global trade regime, and the size of that mess requires a qualitative assessment. Powell can’t say “We’ll cut rates in September if Trump threatens Xi Jinping seven times on Twitter, but not if he only does it five times”; he’s going to have to make a judgment call about where we stand with trade (and about how businesses and investors are responding based on their own assessments about where we stand with trade) when the time comes.
“I would love to be more precise, but with trade, it is a factor that we have to assess in a new way,” Powell said, diplomatically. “It is not something that we have faced before and we are learning by doing,” he said at another point.
Powell repeatedly emphasized today that the overall economic outlook is positive. In fact, a key undertone of his remarks was that the economy is generally good, except for a few specific things that Trump is screwing up, and the future trajectory of interest rates will have to depend on the degree to which Trump screws them up going forward.
Powell had a clarification about that, too.
“We play no role in assessing or evaluating trade policies other than as trade policy uncertainty has an effect on the U.S. economy in the short and medium term,” he said. “We are not in any way criticizing trade policy; that is really not our job.”
In other words, when the president screws up the economy, the Fed has no commentary to offer on that except to the extent that the screwing up of the economy has implications for monetary policy.
Powell took pains to portray today’s cut not as the start of action to ease monetary policy but as a continuation of easing actions it has taken since December. After market participants panicked late last year because the Fed appeared inflexible, Fed officials emphasized that they would adjust policy in response to new data as appropriate; they stopped hiking rates; they expressed openness to slowing the pace at which they would reduce the Fed’s asset holdings; they floated the possibility that they would cut rates; and now, today, they have actually cut rates.
Powell, perhaps in response to presidential complaints that the Fed has been failing to buttress the economy, pointed to that chain of moves to argue that the Fed had already been bolstering economic growth by giving businesses and consumers confidence to invest, spend, and grow — counteracting presidential actions that would tend to hamper growth.
That the stock market fell today should not be taken as a mark against Powell’s leadership. If market participants developed expectations about future Fed policy that weren’t in line with the views of Fed policymakers — if they came to expect three rate cuts this year when the Fed was not prepared to offer them — then there was no way he could have delivered that news without causing stocks to fall.
And Powell likely has little choice but to be vague about how the Fed will continue to do that going forward. Two of the 12 members of the FOMC dissented from today’s decision to cut rates, saying they would have kept them steady. And Powell noted that the FOMC members who did favor the rate cut did not necessarily all place the same weight on the factors that drove them to cut. There were headwinds from things like global manufacturing troubles and the trade wars; there was new evidence that sustainable long-run levels for unemployment and interest rates are lower than Fed officials previously thought; and there is a desire to insure the U.S. economy against economic risks that may arise. In the future, if those three factors move in different directions, so may different FOMC members about their policy views. This limits Powell’s ability to say for sure what they might do later.
The modest extent of the decline in stocks — even when the stock market seemed fixed on the most hawkish possible interpretation of Powell’s comments, that this was a “one-and-done” rate cut — suggests the stock market will live with the disappointment even if the Fed decides to cut no more, assuming the Fed makes that decision in a context of relatively unchanged economic circumstances.
Whether the president can live with it is a separate question.