The statement and press conference following the January 30th Federal Reserve policy meeting was, with little doubt, a further pivot to a dovish stance. The statement below is from the prior December meeting and marked up in red to highlight changes in the current January 30th statement. The big clue about future interest rate policy is in the following addition: “the Fed will be patient as it determines what future adjustments to the target range…” “Patient” tells us that the Fed’s plans to raise rates two or three times in 2019 are now on hold. It also leads the reader to believe the next move could just as easily be a reduction in rates.
The next important takeaway came in regards to the Feds balance sheet. In the press conference Jerome Powell, as he has done recently, alluded to the idea that QT is not on “autopilot” anymore. In other words, it is likely the Fed will not continue at the same pace at which they are shrinking their balance sheet without considering the economy and financial markets. We stress the word “autopilot” because that was how Jerome Powell to described the pace of balance sheet reductions at the December 19, 2018 FOMC meeting press conference. The ensuing market mayhem in the days following the press conference appears to have rattled the Fed into modfying that take quite substantially. In fact they have done a 180 degree reversal in only six weeks.
The last takeaway curiously involves QE. The Fed released a supplementary statement entitled Monetary Implementation and Balance Sheet Normalization in conjunction with the FOMC statement. The bullet point below from the statement makes it clear that increases to the balance sheet, also known as QE, will be a part of their tool kit going forward. This is curious as Powell was adamant that QE two and three should not have been executed after the financial crisis abated. Now, without much reason, the specter of QE is being raised.
A reporter asked Powell why the abrupt change in the way policy was being discussed. Powell danced around the question with a dialogue of the government shutdown and slowing global growth. The shutdown was temporary, and the effect is very limited, estimated at less than 0.1% of GDP. Global growth is in fact slowing, but that has been the case for the last nine months.
In our opinion, the Fed’s new warm and cuddly tone is all about supporting the stock market. The market fell nearly 20% from record highs in the fourth quarter and fear set in. There is no doubt President Trump’s tweets along with strong advisement from the shareholders of the Fed, the large banks, certainly played an influential role in persuading Powell to pivot.
Speaking on CNBC shortly after the Powell press conference, James Grant stated the current situation well.
“Jerome Powell is a prisoner of the institutions and the history that he has inherited. Among this inheritance is a $4 trillion balance sheet under which the Fed has $39 billon of capital representing 100-to-1 leverage. That’s a symptom of the overstretched state of our debts and the dollar as an institution.”
Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.