Fed Doesn’t Yield to Equity Doves; Treasury Yields Fall

Flushed into a tough corner by President Donald Trump’s continuous calls for lower interest rates, Federal Reserve Board chairman Jerome Powell didn’t move much from his prior stance. That disappointed investors hoping for some sign of another Fed Funds rate cut. Unsurprisingly, Trump blasted Powell in tweets. (See page 10.)

In a much-watched speech Friday at the Kansas City Fed’s annual central bankers meeting in Jackson Hole, WY, Powell said the Fed would provide stimulus if a global economic slowdown damages the American economy. What he didn’t say was what the market wanted: a clear sign that there would be more rate cuts.

Though Powell didn’t repeat his now-infamous July 31 comments that the Fed’s recent rate cut was merely a “mid-cycle adjustment,” he did not promise additional easing as some investors had hoped.

What’s perhaps worse for investors in terms of hope, Powell went out of his way to warn markets about the limits that monetary stimulus faced. In other words, the Fed cannot magically address business-confidence anxiety or market volatility that derives from trade war uncertainty.

“In principle, anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy, and that could include uncertainty about trade policy,” Powell said. But there are no precedents to today’s environment and though monetary policy can aid business investment and public confidence, “it cannot provide a settled rulebook for international trade,” he said.

This, then, is Powell’s response to Trump, and not through tweets, so I’m not sure the President will get the message.

Meanwhile, European Central Bank officials gave another signal they would launch a significant stimulus package—including combining interest rate cuts with bond purchases—next month, in an effort to arrest the region’s economic slowdown. This is just the kind of thing that will get President Trump to launch another fusillade against the Fed. Ironically, the Old World economy may have started to steady in recent weeks after the flash composite Markit purchasing managers index for the eurozone rose to 51.8 in August, from a previous reading of 51.5. Above 50 indicates expansion.

Powell remains boxed in. If indeed the Fed does cut rates in September, as investors expect, the Fed must articulate why absent obvious signs of economic deterioration in the U.S. Fed officials generally supported the July rate cut to cushion the U.S. against a slowing global economy. However, policy meeting minutes released Wednesday show there is disagreement about the risks.

The minutes suggest officials will take a meeting by meeting approach when deciding on interest rate changes. July’s rate cut was only “part of a recalibration” of policy.

The 10-yr note yield ended Friday around 1.52% versus 1.55% the previous week.

Upcoming: 9/17-18 - FOMC meeting. That’ll be very interesting.

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