Thursday, September 19, 2019

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‘I have no reason to think that will change’

On Wednesday, the Federal Reserve lowered interest rates by 25 basis points, its second rate cut in as many meetings. The market’s response was muted.

But this relatively quiet market response belies a muddied outlook for the Fed, which economists at Capital Economics said shows the central bank is “more split than ever over what to do next.”

In his post-meeting press conference, Fed Chair Jay Powell was asked to go beyond outlining the Federal Open Market Committee’s (FOMC) view on policy, and tell us what he himself really thinks about all this.

In his view, the Fed has been and remains flexible, ready to change course, and not married to any path forward. Even if the Fed’s own divided projections suggest one more rate cut is coming this year.

“I think that the idea that if you see trouble approaching on the horizon you steer away from it if you can, I think that's a good idea in principle,” Powell said Wednesday. “And I think history teaches us that it's better to be proactive in adjusting policy.”

Powell added that a “bulk” of the FOMC is judging their policy decisions “meeting-by-meeting,” and more or less included himself in that group. “I think you've seen us being willing to move based on data, based on the evolving risk picture,” Powell added. “I have no reason to think that will change.”

In other words, Powell wants to de-emphasize the forecasts put forth by Fed officials because they are not just in theory but also in practice subject to change. Or, in some cases, a lack of change.

Ian Shepherdson, an economist with Pantheon Macroeconomics wrote Wednesday that he was “baffled” by the Fed’s economic forecasts for next year. Against the backdrop of global growth that Powell said has weakened since the beginning of the year, the Fed called for the same level of GDP growth, unemployment, and inflation next year.

“We expected the growth numbers to be cut and the inflation forecasts to rise,” Shepherdson wrote. “It’s possible, though, that the spread of forecasts has widened, without moving the medians.”

Meaning, as Powell suggested and Shepherdson concludes, “the overriding message...is uncertainty.” And more of it.

So what Jay Powell really thinks about the future is that he’s not sure what he thinks. Things could change. Or not.

It’s a message perhaps unsatisfying to investors who believe the central bank should have a better grasp of the future than a guess. But perhaps not an unexpected view to be held by a central bank sees the economy’s biggest levers being pulled by other forces.