The Powell predicament
Fed Chair Jerome Powell has been put in a tough situation by President Trump and the market ahead of July's FOMC meeting, with his hand forced in the face of historic uncertainty — but he hasn't done much to help himself.
Why it matters ... The U.S. economy is at a delicate moment: trade and manufacturing data are worsening, jobs growth is volatile and slowing, and the bond market is bracing for the worst while equity investors keep expecting the best.
Driving the news: Powell again sought safety in equivocation on Tuesday, noting during a speech at the Council of Foreign Relations that "the global risk picture has changed ... since May 1, significantly," but also saying "it’s important not to overreact in the short term to things that happen to be temporary or transient."
Be smart: The Fed chair has responded by embracing what Axios' Felix Salmon calls "constructive ambiguity," pushing back against the blueprint created by predecessors Ben Bernanke and Janet Yellen. They dictated the Fed's plans to the market with forward guidance and long-winded policy statements. Powell has reversed course.
- "Rate guidance as a tool is about the Fed being in front of markets and leading them to where [the Fed] wants to go," Vincent Reinhart, a 24-year Fed veteran who now serves as chief economist at Standish Mellon Asset Management, tells Axios.
- "December's [FOMC meeting] showed that if you're leading, you are the target of criticism, both from the markets and the president, so they switched to much more data dependence ... and moved from the front of the pack to the back."
The bottom line: Powell is not just fighting Trump's continued criticism, as Axios' Courtenay Brown writes, but also his trade war's negative impact on the U.S. economy, while also having to hedge against a surprise agreement.
- An "insurance rate cut" in July could not only prove a policy mistake, but further erode Powell's credibility and the Fed's.
- But not cutting rates will put him in the crosshairs of the president and the market, which has investors pricing in a 0% chance he doesn't do it.