Oct 31, 2019

The Federal Reserve's amazing pause

Dion Rabouin, author of Markets

Illustration: Eniola Odetunde/Axios

Fed Chair Jerome Powell almost rocked the boat during the FOMC's October press conference on Wednesday after announcing a third straight cut to U.S. interest rates.

What happened: Powell initially said it would take a "material reassessment" in the outlook for the Fed to change its view that no further rate cuts were needed — but minutes later he reversed course, saying that holding rates at their current levels would be appropriate as long as the outlook stayed within the Fed’s expectations.

Quick take: That meant the Fed's rate-cutting cycle went from pause to "pause lite," DRW Trading rates strategist Lou Brien tells Axios.

  • Powell's adjustment to "pause lite" reversed the decline in U.S. equities and the gains in U.S. Treasury yields and the dollar, sending both lower on the day.

The big picture: "Pause lite" is also an apt description for the status of the global economy's two major risks — the U.S-China trade war and Brexit.

  • The tariffs on imported U.S. and Chinese goods that have been wreaking havoc on the manufacturing sector, business sentiment and investment remain in place, but no new tariffs have been added thanks to the "phase one" trade deal.
  • Similarly, Brexit has been pushed back to Jan. 31, leaving in place the uncertainty that has curtailed business activity in Britain and caused economic growth to fall into negative territory in Q2. But the U.K. is still in the EU.

Why it matters: "It can be said that Powell thinks there will not be any reason to ease again in the short or medium term, but that he can be convinced to ease if things don’t go right," Brien adds.

  • Powell's view seems to reflect that of the market, as stocks have jumped to new all-time highs this week and Treasury yields have risen to their highest level in more than a month, with the yield curve steepening.
  • And with Powell's assurances that the Fed will be there to cut rates further should things get worse, the market is feeling confident.

Between the lines: Rick Rieder, BlackRock’s CIO of global fixed income, asserts that the Fed's policy rate is now just right and is "delivering a very powerful dose of the 'right stuff' from a policy perspective."

  • The Fed has moved to near "the equilibrium rate of interest in an economy that’s facing aging demographic trends, and which benefits from still positive interest rates," Rieder says in a note.
  • "Vitally important is the fact that Fed policy will stop short of persistently cutting rates into the unproductive arena of negative rates."

Go deeper: Federal Reserve announces third consecutive rate cut

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