For a year the Fed has been off-the-market in analyzing the economic contraction abroad and the sluggish conditions at home, notes Gene Inger. He’s presenting at MoneyShow Orlando.
“Fewer interventions,” was the singular phrase in Federal Reserve Board Chairman Jerome Powell's Fed new conference that sums it up with regard to balance sheet unwinding.
The Chairman sort of acknowledges risks greater to the downside (or what he terms “baseline”); so pretty much followed-on similar calming comments we've frequently noted by ECB President Mario Draghi.
In fact, while the policy stance wasn’t changed, it really was. How so? Because the FOMC acknowledged all the major global disruptions and sluggishness. This matters, because for a year the Fed has been off-the-market in analyzing the economic contraction abroad and the sluggish conditions at home.
The Fed was extremely transparent. He's talking about terminal levels of reserve, so that makes degrees of accommodation perhaps variable, in the longer-run. It means that in future FOMC meetings they'll address it a bit further; but so far no finality or judgement about how things will go. That means there are too many known unknowns to be decisive with any moves, or prospects for continued tightening.
Observations on the FOMC Policy Statement and Chair Powell’s comments:
- Crosscurrents will be with us for a while economically; and the Fed will respond or modify accordingly;
- The Fed is not being lazy (this time); and thoroughly address the discrepancy between how they previously assessed the economy, mostly to spin their desire to unwind the balance sheet;
- The balance sheet run-off can be constrained also with rates relatively low (why retire paper unless rates firm, and that's not the demand issue they feared and we had addressed during last week's excessive levels;
- The S&P responded by internally correcting (lots of money exiting on rallies) throughout last year, while certain stocks were essentially manipulated to hold-up Indexes;
- An expectation of the Fed not so much capitulating, but recognizing reality
- The extension of the rebound into and beyond what I described as a target congestion zone roughly between 2600-2700 in the S&P 500, is ongoing and reinforced by the Chairman's reflections and the formal Statement;
- The economy was neither as strong as the Fed or President Trump had contended, which is why the President's pressure on the Fed made no sense on the surface, if one believed things were so strong;
- The recent Beige Book related to tariffs and other forthcoming risks was mentioned, and as regional costs due to trade issues are revealed; so far not enough implementation of tariffs to have any material effect on China or the U.S.;
- There's a sense of a “Powell Put” on the markets; hence bullish, at least for the moment; so in this case it is a rare transparent bit of clarity; and not Fedspeak;
- He won't say the tightening cycle if formally over; but that's essentially the bottom-line of the variable length of this 'newly patient Fed period'.
In-sum: the Fed's policy stance is appropriate for now. It also correlates with our view of the S&P 500 nudging-up into higher levels for now. Certainly the market holds within the higher portions of what I have described as a congestion zone of 2600-2700.