–Cross-Currents To Continue and So ‘Patience’ Remains Watchword
By Denny Gulino
WASHINGTON (MaceNews) – The markets were hanging on Federal Reserve Chairman Jerome Powell’s every word Wednesday afternoon and as he answered questions after the Federal Open Market Committee meeting stocks were roaring, the dollar was weakening, Treasury prices were rallying and pundits everywhere mostly ignored his reluctance to characterize the economy’s future this year.
Powell’s assessments were mostly present tense, saying the economy is strong and whatever is happening now is likely to continue, without specifying how long. Along with the usual data dependency was a sort of uncertainty dependency, with conflicting signals seemingly tying the Fed’s hands, again, for now.
The Dow Jones industrials were a dial test of ebullience, peaking as Powell’s press conference was ending and staying ahead by more than 400 points as the index approached the close that showed a gain of 1.8%. The Treasury 10-year was up 7/32 in price and the yield slipped to 2.688%.
Throughout Powell left open the number of rate hikes ahead this year, other than to hint that it would not be a scary number.
“It’s going to depend entirely on the data,” he said. “Some of the cross currents may be with us for a while.”
On the balance sheet question, of whether normalization is already close to a new normal, he said it would end up “no larger than it needs to be for us to efficiently and effectively conduct monetary policy” and, he added, “It’s good to take your time” in figuring that out.
“No decisions have been made,” he said and there have been only discussions about decisions. Asked if the markets are right that the portfolio will end up around $3.5 trillion, he didn’t stridently disagree.
He did drill down, saying the “understanding” of bank demand for reserves had evolved to realize a larger balance sheet is called for than before the financial crisis, not the demand itself. Reserves are “roughly equivalent” to Treasuries in quality and so the Fed, he said, is not about to discourage banks from holding them.
The government shutdown’s losses will be mostly recaptured, he said, adding that something perhaps more important is on the Fed’s radar. “Financial conditions began to tighten in the fourth quarter and they now have persisted and remained tighter, significantly tighter,” he said.
Is this the end of the tightening cycle? “We’re going to know in hindsight,” Powell answered. “The length of this patient period is going to depend entirely on incoming data and its implications for the outlook.”
Given that fresh earnings data both reinforced the picture of a slowing China as well as contradicting that notion while jobs numbers – to be updated for January on Friday – signal continuing strength, it remains for analysts, without the benefit of hindsight, to wonder if the net result will be an economy that needs some more Fed ice packs sooner rather than later.
The post-FOMC statement had one of its major signposts eliminated this time around, with the future apparently so muddied that the Committee could not even say whether risks are roughly balanced.
The statement and Powell’s responses made clear that inflation is not among the proximate risks. There’s so much to think about and inflation is nowhere near the top of the list, he seemed to say. “It’s interest rates, it’s risk spreads, it’s currency, it’s stock market, it’s credit availability, it’s many, many factors” the Fed has to keep track of.
Another thing the Fed doesn’t formally worry about, though it’s a constantly worsening picture, is the mounting debt the nation accrues year after year, recently highlighted by a Congressional Budget Office projection Powell conceded he hasn’t read.
Earlier in the day, at the Treasury department’s quarterly announcement of borrowing policy, the private sector committee of bond market participants was shown to have observed that there’s a potential financing gap in the next decade, and a possible need for domestic investors to increasingly take the place of foreign investors.
Powell acknowledged again that, yes, fiscal policy is “unsustainable.” Once again he said that’s a long-term concern and the Fed concentrates on the near to medium term.
As Cabinet members and other administration officials met with their China counterparts during the day to begin to tackle the trade dispute with specifics, Powell repeated tariffs themselves are so far not affecting the U.S. economy despite the repeated concerns about them voiced by business executives polled for the Beige Book survey of economic conditions.
“The longer term concern is that the negotiations going on, if they linger, then there could be more and more uncertainty and you worry over time that that could have an effect on business confidence,” Powell said. “Uncertainty is not the friend of business.”
However Powell’s observations seemed to be his hint of a silver lining for those enamored of a dovish Fed, that an unresolved trade dispute with China might by itself compel the Fed to hold off longer.