Fed Speak

Jan 30 Fed Chariman Jay Powell press conference Post FOMC Meeting..
Important narratives that came out of the press conference

#1: Powell completely endorsed patience when considering the Fed’s next rate move. Most of the 23 questions he took focused in one way or another on this topic. To his thinking, interest rates are close enough to neutral already. His only concern: the possibility of accelerating inflation, although he took pains to explain that the Fed’s 2% target is “symmetrical”. They could, in other words, stomach a short period of higher inflation if it were transitory.
#2: He cited numerous “cross currents” which may continue for “a while” that collectively argue for a wait-and-see attitude. These included:
  • Slowing economic growth in China and Western Europe that could hurt US exports.
  • The possibility of another US government shutdown that could meaningfully sap consumer confidence.
  • “Considerably” tighter financial conditions in global capital markets. While he didn’t go into the numbers, it is worth noting that US high yield corporate spreads have expanded from 3.3 percentage points in October 2018 to 4.4 points today. And despite 2019’s rally, US stocks are still below Q3 2018 levels as well…
  • The possible chilling effect of protracted US/China trade negotiations on business confidence.
  • The possibility of a hard Brexit, although in response to a question he said this risk was largely limited to US banks with UK/European operations.
  • Notably, while Chair Powell sounded concern about the long-run trajectory of US fiscal deficits, he said it was not an issue over the “medium term” or this year.
#3: He framed the concept of a “Fed put”, where the institution changes rate policy         whenever capital markets falter, as the central bank’s need to address market volatility before it reaches the real economy. He tried to differentiate between short-term volatility in one or two markets (which the Fed should ignore) and longer lasting cross-market signals (that the Fed should incorporate into policy decisions).
#4: On the issue of the size of the Fed balance sheet, Powell showed he has an open mind. His points today:
  • He does not want to discourage banks from leaving reserves at the Fed since that keeps the US financial system on solid footing. These deposits, whatever their size, require the Fed to remain invested in government-backed securities.
  • As for where these balances settle out, the Fed is still undecided.
  • The same goes for which maturities will go into the portfolio. Powell’s perspective is that these issues are complex and it’s “good to take your time” before the Fed comes to any conclusions.
What we took away from Powell’s comments as they relate to equity markets:
  • He cemented a narrative that the Federal Reserve will not raise rates this year. Fed Funds Futures now show 80% odds that the Fed is on hold through the rest of 2019. The odds of one rate increase dropped to 8% today from 19% yesterday.
  • That shifts market attention to US/China trade negotiations. As we’ve been mentioning in these notes, first half US corporate earnings will be lackluster at best (0-3% growth). Hopes for better back half performance now hinge on a meaningful trade deal.
  • Let’s not lose sight of why the Fed has changed course: meaningful near term risks to the US economy. They know 1H earnings will be sluggish; they know trade talks could break either way; they know the world’s economies are slowing. They have eased up on rate increases because macro factors are worse now than 30 days ago.
Jan 16 - Raphel Bostic -  Quantitative Frightening?

  • First, the normalization process is designed to be gradual. It was phased in over the course of about a year and a half and is now subject to monthly caps so the run-down is not too rapid.
  • Second, the normalization process is designed to be as predictable as possible. The schedule of security retirements was announced in advance so that uncertainty about the pace of normalization can be minimized. (In other words, "quantitative tightening" is decidedly not on the QT.) As a result, the normalization process also reduces complexity. Balance-sheet reduction has moved into the background so that ongoing policy adjustments can focus solely on the traditional interest-rate channel.
This talk ends with a dovish outlook, reflecting Fed Chairman's stance on being paitent.  Raphel Bostic -  "In addition to my monitoring of developments on Main Street, I will be watching financial conditions and term premia as I assess the outlook for the economy. My view is that a patient approach to monetary policy adjustments in the coming year is fully warranted in light of the uncertainties about the state of the economy, about what level of policy rates is consistent with a neutral stance, and about the overall impact of balance-sheet normalization. This patience is one of the characteristics of what I mean by data dependence."

  • Bostic says that 2018 was a stellar year in terms of aggregate economic statistics and that the Federal Open Market Committee has likely come close to achieving a neutral monetary policy stance.
  • His current baseline outlook for the U.S. economy in 2019 is for another year of solid growth, although a bit slower than in 2018 as the temporary effects from fiscal stimulus and tax reform begin to fade.
  • Bostic says that the execution of data dependence employs multiple efforts at the Atlanta Fed that go well beyond just tracking the official statistics. He also leans heavily on an extensive network of business contacts, community groups, and nonprofit organizations.
  • Bostic notes that grassroots intelligence from Main Street and messages from Wall Street indicate heightened uncertainty and concern about the economy, but the aggregate economic data continue to paint a robust picture.
  • Bostic feels the appropriate response to these mixed signals is to be patient in adjusting the stance of policy and to wait for greater clarity about the direction of the economy and the risks to the outlook.
Jan 4 - Richmond Fed Tom Barkin
  • The national economy looked very strong in 2018. But as we enter 2019, many people are asking how long this pace of economic growth can continue.
  • Long-term economic growth depends on the number of people working and how productive they are.
  • With slow population growth, future growth of the labor force may depend on people currently on the sidelines of the labor market.
  • Opportunities to grow the workforce include policies to support women’s labor force participation, workforce development and legal immigration.
  • Productivity growth also has lagged the past decade, perhaps due in part to business underinvestment and declining startup rates.
  • Policymakers need to promote a healthy and stable environment for business investment.

Jan 4 -  Cleveland Fed President Loretta
  • 1 - 2 rate hikes this year, but depends if the inflation is moving up and where the economy is going 
  • Balance Sheet - Roll of $600 billion, not reconsidering the roll off the balance sheet. 
  • Business contacts more optimstic than markets, hiring is an issue.
  • Growth will slow, but no recession.
Jan 4 -  Federal Reserve Chairs: Joint Interview

  •  We are listening to the signals markets are sending (global growth and trade concerns), will consider downside risks as we set policy.
  • Balance Sheet Normalization - 
    • Rates was meant to be the active policy tool. Balance sheet was meant to be reduced as part of policy normalization
    • Wouldnt hesitate to change
Jan 3 - Dallas Fed Robert Kaplan said the U.S. central bank should put interest rates on hold as it waits to see how uncertainties about global growth, weakness in interest-sensitive industries and tighter financial conditions play out.

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