Global Daily – Just

by: Han de Jong

Fed View: “Just” – In his speech to the Economic Club of New York, Fed chair Jay Powell spoke mainly about the Fed’s framework for monitoring financial stability. On the same day the Fed published its first semi-annual Financial Stability Report and Powell’s talk provided an overview of the key messages of the report. While Powell said that the report did not reach a single conclusion, he compared the findings to what his doctor might tell him at a regular check up: ‘there are a number of things we should keep an eye on, but all things considered you are in good health’.

Powell also took the opportunity to make some remarks on the economic outlook and monetary policy. The most important word in the speech was ‘just’. Markets for risky assets really liked that word and they rallied instantly. The sentence in which ‘just’ appeared read: “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 — that is, neither speeding up nor slowing down growth”.

A key question for markets is how much further the Fed will raise rates. Not so long ago, Powell had said that rates were still a distance away from neutral. He now seems to have a slightly different view. The chairman obviously cannot be too explicit about policy intentions as he does not make policy all by himself. Any hint must therefore be subtle and not too explicit.

In the September dot plot, the median view of the FOMC members was that five more hikes were coming between September and the end of 2020. Another hike next month has been largely priced in and Powell did little to talk markets participants out of that view. But by adding the word ‘just’ about how far rates are away from neutral, Powell signalled that five more hikes in this cycle are unlikely. We had pencilled in three more hikes between now and the end of 2019 and none in 2020.

The word ‘just’ comes on top of some relatively dovish remarks Powell recently made during an interview he gave at the Kansas Fed where Dallas Fed president Robert Kaplan asked him questions. Powell then mentioned that the Fed needed to take three important factors into account: the weakening of growth outside the US, the fading of the fiscal stimulus in the second half of 2019 and the effects of past tightening. This all sounded relatively dovish. Vice chair Richard Clarida had also been somewhat dovish recently.

The conclusion we draw is that the expected December hike is likely to happen. Make no mistake, Powell did say, correctly, that US economic growth is currently robust. However, we now think that the Fed will only implement one more hike in 2019, some time during the first half (Han de Jong).