Fed stays the course on interest rates

Mr. Powell

In a much anticipated meeting, and with a much anticipated move, the Federal Reserve Open Market concluded its meeting on Wednesday and decided to let rates remain the same between 2.25 and 2.5 percent range, currently holding at 2.5; historically low, but high in terms of the last decade.

For some this soothes the markets, but some others have opined that this does leave the door open for 2020 cuts. And, some see that there might even be a change in July, while still others say that Wednesday's announcement could keep options open

The 9-1 vote also signaled to many observers that this was a divided move and that there was some dissension among members as they hatched out the dot plots, the anonymous charting of rate moves, that the Fed has recently used.

“This was probably the compromise decision — it wasn’t shocking and should offer some reassurance,” Steve Rick, chief economist at CUNA Mutual Group, said in a note, quoted by CNBC,  “The FOMC will still want to closely monitor the stress fractures from the bond market, middling housing and auto sales numbers, and an increasingly uncertain global economic landscape in the coming months.”

Some have said, most notably, The New York Times, that “Though there are economic reasons for the Fed’s greater caution, it carries a political risk: The Fed might appear to be bending to the president’s will.”

In that vein, the news also seemed to soothe concerns, at least for now, on the part of the Administration, whether President Trump will sack Fed Chair Jerome “Jay” Powell whose dovish moves have led the president to blame Powell for not having a market rebound.

“If the Fed had done its job properly, which it has not, the Stock Market would have been up 5000 to 10,000 additional points, and GDP would have been well over 4% instead of 3% … with almost no inflation,” Trump tweeted on April 14.

For his part, the chair has said that the law is clear, and that he “fully intends to serve” his four year term.

Senior White House advisors have said, that only for the most egregious conduct, or to use the term “for cause”, could Powell be sacked; but, they have suggested that he could be demoted.

Powell for his part has powerful friends, including Sen. Richard Shelby (R-Alabama) who is a senior member of the banking committee, who said, “We should make sure that the independence of the Fed is above politics as much as you can and doesn’t accommodate one group or another, or one person or another, or one president or another, but does what’s best for the economy.”

“That would be an unprecedented step, and the White House probably lacks the legal authority to make such a move. The Fed chair is a Senate-confirmed position, and the Fed is an independent agency,” opined the Times.

Trump who launched his reelection bid, on Tuesday, faces polls that show him trailing  former Vice-President Joe Biden, and some say that he needs to ramp up his strong economy, his possessive, that it has never been better, as the gain to reelection, while others opine that the president needs to let the Fed maintain its historic independence from politics.

The FOMC has clearly evolved from prior moves and according to Yahoo Finance, “The new dot plots show Fed officials tilting closer toward a rate cut by the end of 2020. Nine members now see a case for up to two rate cuts in that same window of time. For comparison, the March dot plot reflected only seven members seeing a case for a rate cut by the end of 2020 — and none projected more than a single 25-basis point cut.”

Perhaps most revealing was that “The June update shows some members still taking a hawkish stance. Three Fed officials see a case for at least one rate hike by the end of 2020, with one of those three officials predicting three rate hikes.”

Supporting that view is Neil Birrell, chief investment officer at Premier Asset Management, who said, “The Fed didn’t surprise investors with the decision to maintain rates, but the split vote tells us that a cut is on the way and it’s increasingly likely that will be in July, as bond markets have been hoping.”

These projections also “saw a tick down in future expectations for inflation. In March, the median Fed official projected the economy touching 2% on core personal consumption expenditures (the central bank’s preferred measure of inflation) by the end of 2019 and hitting that target again in 2020 and 2021.”

The Fed’s historic mandate of keeping inflation at 2 percent, or lower, is one that faces a variance of opinion among economists, and even politicians who have described themselves as populists.

In a statement after the announcement, the Fed “also changed wording to concede that inflation is “running below” the Fed’s 2% objective. In their forecast for headline inflation this year, officials slashed the estimate to 1.5% from March’s 1.8%. Core inflation, which excludes volatile food and energy prices, is likely now to be 1.8% from March’s 2%, according to the quarterly summary of economic projections also released Wednesday.”

Bloomberg Businessweek, this past April, had a cover story on “Who Killed Inflation”, and asked “Was it killed by central banks, with high interest rates the murder weapon? Or is it not dead at all but just lurking, soon to return with a vengeance?”

Or, as Bernie Sanders and Alexandria Ocasio Cortez have suggested, is the culprit class struggle related to a neo-Marxian effort at wage suppression, which as we have seen in recent job reports, is down, and staying down?

“Richard Clarida, a Columbia University economist who began a four-year term as vice chair of the Fed in September, likes to point to the decline in labor’s share of national income, to 66.4 percent at the end of 2018, from a range of 68 percent to 71 percent from 1970 to 2010. His implicit argument is that business could give labor a solid raise without raising prices of goods and services, as long as it was willing to give back some of its increase in the share of national income,” noted Bloomberg..

The change in wording from the Fed might also help understand the problem of low inflation, because, as Bloomberg said, in an earlier and prescient mood, “Powell acknowledges, persistently low inflation is hard to explain using standard macroeconomic theory. Price pressures were weak in the aftermath of the global financial crisis because there was a lot of slack in the economy, including underutilized factories and workers. What’s surprising now is that even after one of the longest economic expansions in U.S. history, and with the unemployment rate hovering around half-century lows, inflation is still subdued.”

Going even further, “The Fed has repeatedly missed the target it set in January 2012 of 2 percent annual change in the price index for personal consumption expenditures. Once you strip out volatile food and energy prices, inflation by that measure has reached 2 percent just one month (July 2018) in the past seven years.”

That seems to have echoed what Powell said in January, where he “was declaring that the economy seemed strong enough to sustain two quarter-point interest-rate increases in 2019, on top of the four the Fed orchestrated last year. But inflation has again come in below the Fed’s expectations, and both 2019 rate hikes have been erased from the median forecast of the bank’s policymakers.”

The road ahead is more than traveled, and with the tariff war with China, and the president's willingness to slap a tariff on any country he picks a fight with, and a slowing of the economy, plus a May Jobs Report that showed less robust numbers, especially with revisions, most economists and observers are cautious, for just cause, with the outcome of the FOMC decision.