Jerome Powell Didn’t Say ‘Rate Cut,’ and That Matters
(Bloomberg Opinion) -- As the first headlines came in from Federal Reserve Chair Jerome Powell’s remarks on Tuesday, the bond market reaction was pure jubilation.
Two-year Treasury yields instantly sank almost 5 basis points, while benchmark 10-year notes reversed their earlier losses on hawkish comments from Chicago Fed President Charles Evans. The first take was seemingly that Powell signaled openness to cutting interest rates if needed because of heightened U.S. trade tensions with China and Mexico.
That’s one way of looking at it. The other is to note that Powell never once uttered the phrase “rate cut” as it pertained to current policy or even anything close to the “downward policy rate adjustment may be warranted soon” comment from St. Louis Fed President James Bullard a day earlier.
No, what seemed to spark the quick rally was that Powell said the Fed was “closely monitoring” the impact of trade developments and would “act as appropriate” to sustain the economic expansion. But take a moment and think about what that’s really saying. Isn’t it fairly obvious that central bank officials would be watching to see if there’s fallout in the data from President Donald Trump’s trade disputes? And Powell has long said that he and his colleagues have an overarching goal of keeping the economic good times going. None of that is new, and it certainly doesn’t come close to validating the rapid move in the $15.9 trillion Treasuries market over the past two weeks.
Obviously, at this point, the idea that the Fed could just as likely raise interest rates as lower them is just not true. Policy makers scrapped that notion in March, when they dropped their median projection to zero interest-rate increases in 2019 from two previously. When the central bank next moves, it’s virtually certainly going to be a rate cut. But divining precisely when that will come is how traders earn their keep.
As I wrote earlier this week, the bond market is not the economy. It will take a flurry of clearly weak data points to truly motivate the Fed to drop interest rates. That hasn’t happened so far. Powell acknowledged as much when he noted that the U.S. has a “strong labor market and inflation near our symmetric 2% objective.” And, as my Bloomberg colleague Conor Sen noted, the Fed chair is aware that using monetary policy to turbocharge inflation comes with its own set of risks. Not to mention that an “insurance cut” could very well backfire and spook investors.
That sounds like a rationale to stand pat and get out of the way as financial markets and the economy digest the shifting trade environment. Powell may not have used the word “patient,” but he and the rest of the central bank appear to be as careful as ever. That should be disappointing to bond traders salivating over imminent interest-rate cuts.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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