Federal Reserve Chairman Jerome Powell told reporters the Fed was “closely monitoring” the effects of trade tariff talk and developments and would “act as appropriate,” holding out that the Fed is calculating the possibilities of a future interest rate cut.
St. Louis Fed President James Bullard claimed the global economic outlook has “darkened” with a hint that many interpreted as an indication he thinks the U.S. economy “is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty.” Bullard also pointed out that a “downward policy rate adjustment may be warranted soon.” This pushed the 10-year bond yields to multi-year lows.
So Now the Feds are Giving Signals that the Economy is Slowing.
Now remember in October 2018 when the Federal Reserve Bank of Chicago claimed, “It’s time to read just the policy stance at least to neutral…Let’s see how the economy is performing at that point, and then we might have to do a little bit more after that.”
Fed Chair Powell said in a public statement that U.S. monetary policy is “far from neutral,” suggesting rates have much future to climb. “Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral,” Powell also said. “We may go past neutral, but we’re a long way from neutral at this point, probably.”
Fed watchers predicted the Board would raise its benchmark interest rate to a more mildly restrictive level, above 3 percent, by the second half of 2019. That was when rates were 2.25 so they were saying we needed three rate increases at the time.
It is now June 2019 and no one is talking about raising rates, but now the Fed is giving guidance about possible rate cuts. We’ve had only one hike since October of 2018. The other two rate increases just vanished. There has been no policy change since December of 2018. The Fed raised one more time on December 20th as the stock market started to show very large signs of volatility and Trump claimed “I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy.”
So now there is no more talk from the Fed about raising rates but only guidance about possible lowering due to “Darkness.”
What has changed? Not a lot. The market has wild swings of overzealousness and fears, and the Fed is swing too with its verbal and written words to help reduce the highs and lows of the market. The Fed has significantly changed their most recent position instead of holding a basic policy. Market leaders are divided about whether it’s a good idea for the Fed to change with the whims of the market. Why can’t we have a more organic Fed, one that’s not trying to induce and read the movement of the week (the tea leaves) but focused instead on trying to get the long term right? Not a Fed that says we’re going to raise rates, then weeks and months later claims to have changed their mind. Now we are looking at troubles ahead. Don’t be surprised if, over the next month or two, the Fed realizes it overreacted again and this current “guidance” is reversed.