Powell reaffirms cautious tone
Powell’s speech was mostly about financial stability, but he opened with some words on monetary policy. In light of the recent comments from Powell himself, Clarida and other Fed members, suggesting more caution on the path of future hikes, Powell’s text today is consistent with this less hawkish tone.
Powell started by presenting the current state of the economy and sounding optimistic about the outlook. This has justified the steady normalization of policy over recent years.
He then when on to say that there is not a preset path for rates, The Fed has to manage risks, there are long lags in rate hike effects, and the Fed is looking at both economic and financial data.
This is the first time in recent statements that Powell has mentioned financial data, and indeed that is flashing the clearest warning that risks are building for weaker growth and inflation.
The notes of caution were:
“sound policymaking is as much about managing risks as it is about responding to the baseline forecast.”
“the economic effects of our gradual rate increases are uncertain, and may take a year or more to be fully realized.”
“While FOMC participants’ projections are based on our best assessments of the outlook, there is no preset policy path.”
“We will be paying very close attention to what incoming economic and financial data are telling us.”
The initial headline that hit the screens and may have triggered some selling of the USD was that he said rates were “just below” the neutral range.
What he said more fully was:
“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy.”
This is a similar comment to one Clarida made last week. It says rates aren’t yet into the range of estimates that run from 2.5 to 3.5% (ie. the long run rate projections in the FOMC Summary of Economic Projections.) This should suggest to the market that the Fed could hike rates substantially further yet. In some scenarios, the Fed needs to hike beyond neutral. However, since it contrasts with Powell’s rather off-hand assessment in early October that rates were a long way from neutral, that attracted so much market attention, his words today are contributing to a shift in market sentiment on rates and the dollar.
I think the more interesting part of recent Fed statements, and this one from Powell, is that, now rates are in the vicinity of neutral, they need to be more watchful of conditions. And those conditions, particularly in financial markets (credit spreads, commodity prices, equities) and business anecdotes expressing concerns over trade policy suggest they should step off the escalator and look around for a while and assess conditions more carefully. This inevitably takes time. Hence it is time to pause.