September FOMC: Taking It “Meeting by Meeting”

 

If the last two FOMC meetings have marked turning points, the latest confirmed the new status quo. Once again, without committing to any of the actions that financial markets expect in the future, the Fed nonetheless delivered what was expected of this particular meeting. The noncommittal language in the FOMC statement continues to be interpreted as the Fed having no objection to further rate cuts.

The Numbers

The technical details of the day were straightforward, and close to expectations, but they were numerous:

• Rate cut of 25 basis points:  to a range of 1.75% to 2.00%, as widely expected.
• Dot plot non-guidance: The interest-rate projections implied no further rate cuts in either 2019 or 2020, and one hike each in 2021 and 2022.
• Money market tweaking: The rates at the top and bottom of the corridor were tailor cut, as the Fed seeks to reassert control over short-term interest rates. The Interest on Reserves rate (IOR) dropped to 1.80% from 2.25%, while the rate on overnight repo dropped to 1.70% from 2.00%.
• Statement of Economic Projections little changed: GDP growth and unemployment projections this year ticked up (to 2.2% and 3.7%, respectively), as did the GDP growth projection for 2021 (to 1.9%).

The Takeaways

• Forward guidance is dead, and the market doesn’t care: Markets seem relatively complacent with not only the non-committal language of the FOMC statement, but also with Chair Powell’s even more explicit language in his press conference. Asked about the outlook, Powell said the Fed would take it “meeting by meeting.”
• Committee dissension drives the non-guidance: Powell cogently argued that the 2-sided dissents reflected the uncertainty in the economic outlook more than any particular divisiveness on the Committee. Still these do reflect genuine differences of opinion, and they drive the ambivalence of the FOMC’s communications. The market’s relatively sanguine reception suggests it expects the doves to prevail.
• Forget about “keeping some powder dry.” Powell batted away the idea of pausing rate cuts in order to respond to a material increase in recession risk. Instead, he emphasized the idea of being proactive and segued to talking up the virtues of quantitative easing and forward guidance over negative interest rates. This seems to suggest that if the U.S. economic outlook continues to twist in the wind, the Fed will continue cutting rates – and that could be why markets have had such a relatively muted reaction.
• The Fed’s balance sheet is under reconsideration: The notable volatility in money markets this week cries out for the Fed to reconsider its approach to setting short-term interest rates. It looks like we have already reached the point where the Fed’s balance sheet (also known as the money supply) is close to the level where markets are sensitive external shocks. That’s significantly sooner than anyone expected, and while Powell’s comments in the press conference were long on details, they were short on insight.

What’s Next?

• If “meeting by meeting” is the new forward guidance, we may be in for a slog. The U.S. trade disputes don’t look likely to be resolved any time soon, so there will be chronic volatility from the headlines. The Fed will remain sensitive to this issue, despite Powell’s refence to the idea of data dependence. On the latter score, things look pretty good at the moment: While the labor market has shown some signs of cooling, consumer spending looks healthy, housing is showing signs of life, and even manufacturing may be leveling off.
• The Fed has some serious rethinking to do on money markets and its balance sheet, and we may be in for a period of market volatility and policy experimentation before the Fed ultimately prevails. For now, the Fed will be focused on temporary market operations, attempting to calibrate the supply of money needed to keep rates where it wants them, but a longer-term decision could come as soon as the October meeting.