Sep 19, 2019

The divided Fed is losing investors' faith

Illustration: Aïda Amer/Axios

The Fed is doing its best to prop up the U.S. economy in the face of possible economic turbulence, but it's beginning to look like a rudderless ship and it's fast losing the confidence of investors.

Driving the news: The Fed's rate-setting committee cut U.S. interest rates 25 basis points as expected on Wednesday, but did so with 3 dissenting votes for the first time since 2016.

  • The central bank's projections for future policy showed even more discord — 7 members of the 17-member committee said they expect to cut rates again this year, while 5 expect rates to remain at their current level and 5 see rates rising again later in the year.
  • It was a "forceful pushback" against the rate cut, Goldman Sachs economists Jan Hatzius and David Mericle said in a note to clients, and could portend a tougher road for policy action in the future.
  • "[T]he internal inconsistency ... is a reflection of the current divisions within the Fed," said Joseph Brusuelas, chief economist at RSM.

Between the lines: The Fed's more esoteric announcements were even more disappointing and confounding, investors said.

  • The rate cut — typically a sign of economic turmoil — was accompanied by expectations for higher GDP growth this year in the summary of economic projections.
  • Measures intended to stabilize the repo market by lowering key reserve rates were almost universally criticized by economists and money managers, many of whom called it a "Band-Aid" that failed to address the festering problems in the structurally important market.
  • To wit, the New York Fed announced it would need to inject up to $75 billion into the repo market today after losing control of its own interest rate and needing $128 billion of liquidity injections Tuesday and Wednesday.

The big picture: President Trump's trade war, constant criticism and demands for low interest rates have put the Fed in a bind, but Fed chair Jerome Powell and company are not helping their cause either.

  • This is the latest example of the Fed surrendering global leadership on monetary policy.

The last word: "The committee missed an opportunity for a bolder stance that might have provided greater insurance against international risks to the economy," Rick Rieder, CIO of global fixed income at BlackRock, said in a note.

Both the Fed and the European Central Bank lowered interest rates at their policy meetings this month but 3 other major central banks will announce decisions today with no cuts expected.

  • The Bank of Japan made no changes to interest rates at its meeting overnight, and no changes are expected from the Swiss National Bank or the Bank of England at their respective meetings, despite the general easing trend among central banks around the globe.

What they're saying: "Central bank meetings will remain in focus for the next 24 hours with three additional monetary policy announcements on the calendar," Kathy Lien, managing director of FX strategy at BK Asset Management, said in a note to clients.

  • "Recent stability in the financial markets will relieve some of the pressure on policymakers."

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As the Federal Reserve signals it may cut interest rates again later this month, Minneapolis Fed president Neel Kashkari says the central bank is tuning out calls by President Trump to do more to support the economy — and relying on the strength of the data it collects to justify its moves.

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The Fed's September rate cut now looks even more controversial

Fed chairman Jerome Powell.

Minutes from the Fed's September policy meeting were released Wednesday, showing there was likely more opposition to its rate cut than just the 2 dissenting votes that were cast.

Details: The minutes showed debate had grown about when the Fed should stop cutting rates and "several members" wanted to keep rates on hold.

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There's nothing new about Fed disagreement

Reproduced from Federal Reserve Bank of St. Louis; Chart: Axios Visuals

Dissent has been growing at the Fed this year and has only increased since Chairman Jerome Powell decided to cut U.S. overnight interest rates in July.

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Go deeperArrowSep 23, 2019