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August
09
2024
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Don’t bank on a put from Jay Powell’s Federal Reserve
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email [email protected] to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found here. There isn’t one cause of the rout. But one factor was last Friday’s July US jobs report, which sparked fears that the world’s largest economy is on the brink of recession. Investors have also heaped blame on the Federal Reserve, claiming the US central bank has been too slow to cut interest rates from their current 23-year high of 5.25 to 5.5 per cent. As Fed chair Jay Powell finally prepares to make the first US rate cut since 2020, he faces calls to do so in the most dramatic fashion possible. The sharpness of the drop in equity prices has led to talk of an emergency move by the US central bank ahead of its planned mid-September vote. Barring a big financial disaster, that won’t happen. US central bankers are nowhere near as bearish, or as knee-jerk, as investors seem to be on America’s economic prospects. Markets ought to be grateful. As Ernie Tedeschi, former chief economist at the White House’s Council of Economic Advisers, put it to me earlier this week, an unexpected move could sow turmoil rather than correct it. “If the Fed did an emergency cut, that would communicate panic,” said Tedeschi, now an economics professor at Yale. “What they need to be communicating right now is calm.” Adam Posen, president of the Peterson Institute for International Economics, thought a few more days of the sort of turmoil experienced on Monday would warrant Powell coming out with a statement, possibly jointly with US Treasury secretary Janet Yellen, to soothe nerves. “They’d just say ‘We’re ready to act, ample liquidity is available for systemically important institutions and markets, and that the Fed has plenty of ammo’.” Let’s hope words are enough to soothe investors’ nerves until September 18 when markets are banking on a big move. Talk of a 50-point cut at the next vote is reasonable. It did come up indirectly at last Wednesday’s Federal Open Market Committee (FOMC) press conference before the panic began. While Powell said a cut bigger than 25 basis points was “not something we’re thinking about right now”, he later added that if officials “see something that looks like a more significant downturn, that would be something that we would have the intention of responding to”. The market certainly thinks the Fed shares their view that the jobs data shows US growth is about to be wiped out. Just before this newsletter reached your inbox, investors thought there was a 70.5 per cent probability of rates being 50bp lower by the evening of September 18. We are not convinced that’s how Fed officials are reading it, though. The two officials that have spoken publicly this week — Chicago Fed president Austan Goolsbee and his counterpart at the San Francisco Fed, Mary Daly — have both urged calm. While the news on the jobs market was worse than expected, Goolsbee said the data was not yet pointing to a recession and that the Fed was less “volatile” than markets. Daly, a labour economist, said the report left “a little more room for confidence that we’re slowing but not falling off a cliff”. In the past, other rate-setters have said a gradual cooling in the labour market was needed to successfully hit their 2 per cent inflation goal. Between now and mid-September, we’ll hear from Powell at the Kansas City Fed’s Jackson Hole conference at the end of the month and there will be another jobs report for officials to parse on September 6. The jobs data could worsen. If it does, and inflation readings remain in line with — or better than — expectations, then a 50-point move would look to be the likely response. But if the data for August is mixed, it’s not clear investors’ nerves will influence the Fed. There are other barriers to a 50-point cut. The September vote is the final one planned before the presidential election. The Republican candidate Donald Trump has made thinly veiled threats that he would sack Powell should the Fed chair plump for pre-election cuts, on the grounds that it would give the incumbent Democrat administration a boost in the polls. We don’t think the threats scare Powell one bit. They won’t stop a Fed cut. But the electoral calendar might mean that the FOMC will want strong evidence of a significant downturn before going big in September. Nor is this the start of any cycle of rate cuts. It’s the start of one that comes on the back of central banks’ reputations getting badly burnt by inflation rising to their highest level in decades. All the more reason for them to begin cautiously. They will also be keen to avoid a perception that the “Greenspan put” is still a thing and that responding to sharp falls in stock prices by cutting rates aggressively is something US central bankers are willing to do. Sometimes shock and awe is necessary. When inflation surged after the initial stages of the Covid-19 pandemic, the Fed raised aggressively. But, by the time they were raising rates by 75bp at each vote, the evidence that they had waited too long to fight price pressures was overwhelming. The case that we are in the throes of a serious downturn is, in Fed officials’ minds at least, less clear cut. Investors thinking otherwise risk disappointment. Other readables For a bearish take on the US economy, read Tej Parikh’s column. Prefer something more optimistic? Try this, courtesy of Robert Armstrong and Aiden Reiter. This Wall Street Journal piece does a great job of uncovering how technology managed to separate the fastest men in the world in record time.
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