What the Fed Said—and Didn’t Say—Last Wednesday

The big news out of the Fed’s Wednesday monetary policy announcement: Chairman Jerome Powell didn’t get demoted afterwards!^[i] Oh, and the Fed held interest rates steady and tweaked its guidance in an allegedly more “dovish” direction, supposedly throwing a lifeline to markets drowning in trade war and recession fears. We take a different view: Despite near-universal hype of the Fed’s announcement as make-or-break for the economy and stocks, we think it meant little for either—or even for future Fed policy.

Ahead of the Fed’s meeting, headlines pitched it as mission-critical: Would Powell & Co. ride to the fading economy’s rescue by cutting the fed-funds target range? Would they hold rates but signal openness to future cuts? Or would they stay the course, depriving stocks of reasons to march higher? To hear pundits tell it, the Fed went with Door #2. Although they didn’t cut rates, their updated monetary policy statement acknowledged purported economic weakness and hinted at future cuts if fundamentals deteriorate. Plus, for the first time in Powell’s tenure, a voting member dissented, opting for a rate cut. The Fed’s vaunted “dot plot”—which shows members’ guesstimates of the fed-funds rate’s midpoint over the next few years—also showed an even split between people expecting the fed-funds range to end 2019 at its current level and those expecting it to fall.^[ii] Cue a widespread US Women’s National Team-style golf clap as coverage broadly concluded the Fed is bowing to pressure and shifting to a more “accommodative” monetary policy.

However, we see little evidence the Fed changed its plans. The first clue: Financial pundits overthinking Fedspeak is a time-honored tradition. Poor Jerome Powell repeatedly telling reporters in post-meeting pressers that, no, basically nothing changed—and even if it did, it could change again—seemingly doesn’t help, either. See, for example, the February hubbub over Fed plans to gradually wind down (or not, depending) its balance sheet. Thing is, they said basically the same thing in June 2017. Exhibit B: the beating the Fed took after its alleged policy U-turn since October, when Powell allegedly laid the groundwork for a series of rate hikes—and then a nasty (but unrelated, in our view) correction struck. Powell didn’t actually map out several hikes then. But many claimed otherwise—and when the Fed’s January statement said the bank would be “patient” in its rate hike deliberations, pundits argued Fed members were capitulating to political pressure or implicitly acknowledging they had caused the market volatility and were trying to alleviate it. Which, who knows! We aren’t inside Fedsters’ heads and don’t know what drives their decisions. No other observer does, either, barring their bugging 20^th and Constitution Avenue.

The reaction to Wednesday’s non-hike suggests many disagree, thinking they can forecast Fed moves. The Fed’s updated statement—which you can view here via the Wall Street Journal’s nifty tool comparing June’s statement to May’s—is barely different from its predecessor. Most coverage seized on two changes: the insertion of “uncertainties about [the US’s economic] outlook have increased,” and the swap of “the Committee will be patient” in its decision-making for “the Committee … will act as appropriate to sustain the expansion.” Summing these up, one representative headline read, “Fed Scraps Patient Approach and Opens Door to Potential Rate Cut.”^[iii] But in our view, their approach isn’t obviously less patient—nor was the door closed to cuts before. Rather, the tweaks look to us like Fed members reading the room and adjusting their marketing spin after the lambasting they received in spring.

Likewise, framing the Fed’s dot plot as board members “penciling in” or “promising” rate changes is off, in our view. As we have noted on these pages, the plot isn’t a commitment. It is a forecast, a best guess—one that changes along with Fed members’ evolving views. Moreover, if the Fed had released a statement after the meeting saying, “We will cut rates next time, no question, and you can take that to the (central) bank, haha”—even this wouldn’t guarantee cuts. They could change their minds again. Or data could change. Or both. That is what being “data dependent”—and human—is all about. Hence our advice for investors: Don’t react to Fed words and supposed plans. Instead, watch what they do.

The US economy’s strength doesn’t hinge on the Fed cutting rates anyway. As we wrote earlier this month, a lower fed-funds rate would probably be nice for sentiment, given how much recession worry US yield curve inversion sparked in recent months. A rate cut would also slightly steepen the US yield curve—a modest positive for lending but likely not a game-changer. US banks can already borrow cheaply abroad and lend here, exploiting global interest rate arbitrage opportunities. Lower short rates would probably make this practice a bit less attractive, rendering a cut more or less zero sum economically.

In our view, the popular Fed obsession—presuming their meetings and statements hold the keys to this expansion or bull market—is overwrought. Don’t fall for it—the Fed doesn’t have the economy or stocks on a string. Instead, take comfort in people seemingly lacking faith in the economy’s ability to stand on its own two feet absent Fed “help.” We see this as a big brick in the wall of worry this bull market can keep climbing.