by

Waiting On Data

I am a bit rushed for time this morning (this is a busy week traveling up and down I5 with events and speaking engagements in Albany, Salem, and Portland). Still, I wanted to take a minute to highlight some themes this week.

The central policy theme will be tracking data and risks to the forecast for insight into the Fed’s next move. Last week, the FOMC cut rates 25bp and left the door open for further cuts. In the post-meeting Pres conference, Powell was carefully not to give many hints on whether or not that meant another cut in October. Given the wide range of rate forecasts revealed in the Summary of Economic Projections, the next move is not obvious. Consequently, Powell emphasized the data dependent nature of the Fed’s decision making process.

My take – available via Bloomberg – was that the last two rate cuts were relatively easy calls for the Fed. The next move, however, is less obvious given that the data flow is holding up better than expected. The Fed remains caught between wanting to ease and stay ahead of any impending risks to the expansion while avoiding excessive easing that threatens to overheat the economy or create financial stability risks.  Fedspeak last week put the two viewpoints on display; see the Wall Street Journal here. Given the current firming in the data flow, it is reasonable to expect the Fed will hold in October with a risk that they ease. This scenario seems to fit with the current CME odds of a 55% chance of a 25bp cut.

Still, it is easy to tell a story that data and events evolve in such a way as to push the Fed toward another rate cut. Recent firming of the data may prove to be ephemeral, global growth isn’t looking too healthy, and trade remains a wildcard as do other geopolitical events such as Iran. Hence why the risks fall in that direction.

One important point: Although Powell appears noncommittal about the next move and I don’t think we really no what he is thinking, there may be a tendency for market participants to fall into the trap that he either doesn’t have control over the FOMC or that the lack of consensus among policy makers limits his choice set. I don’t think either is true. I think Powell enjoys support of the Board members, can easily bring on a couple presidents to his position, and that he doesn’t care if there is a consensus as long as he is getting the policy right. In other words, I think Powell can get what he wants, so don’t underestimate his willingness to move as he sees fit. He doesn’t need to build a consensus.

In other news, last week’s repo excitement appears to have settled down. There was a ridiculous amount of very bad and sensationalistic analysis floating around the web. This for example:

We all know you don’t total up repo operations as they are by definition temporary and reversed, right?  The “bailout” theme is pervasive last week:

Nope, not a bailout, and supporting these markets is one of the Fed’s jobs. It’s how they manage short-term policy rates.

The basic story is that even though the Fed knew they could run up against scarce reserves, they were still caught off-guard, and their slow response gave the impression that maybe something was wrong. There wasn’t and they were able to address the situation by returning to the pre-crisis central banking. Over the longer run, they will look for a longer term fix such as a standing repo facility or fresh POMOs to expand the balance sheet. In short, this isn’t the crisis you were looking for.

Bottom Line: Wait and see.