What Caused Chairman Powell To Flinch

Clues from the Fed II, an RIA Pro article from November 28, 2018, provided important insight into one of Jerome Powell’s most important speeches as the Federal Reserve Chairman. 

Since the latter stages of Chairwoman Janet Yellen’s term and including the beginning of Powell’s term, the Fed has been on monetary policy autopilot. As a result of policy actions taken following the financial crisis, the fed funds rate was so far below the rate of inflation and economic growth that they felt comfortable raising rates on a steady basis without much regard for economic, inflationary and financial market dynamics. In Fed parlance, they were not “data dependent.”

Based on Powell’s most recent speech and policy trial balloons floated in the media, the fed funds rate is now much closer to the expected rate of economic growth, therefore it is much closer to what is known as the neutral fed funds rate. As a result, future Fed rate moves are expected to be increasingly influenced by incoming economic data. If true, this change in monetary policy posture is one to which the market is far less accustomed.

Powell’s Abrupt Change

On October 3, 2018, Jerome Powell stated the following: “We may go past neutral. But we’re a long way from neutral at this point, probably”

On November 28, 2018, he said: “Funds rate is just below the broad range of estimates of the level that would be neutral for the economy.”

In less than two months, the Fed Chairman’s perspective about the proximity of the fed funds rate to neutral shifted from a “long way” to “just below.” Clearly, something in Mr. Powell’s assessment shifted radically. We have some thoughts about what it might be, but we decided to canvas the opinions of others first.

We created a Twitter poll to gauge our follower’s thoughts on Powell’s pivot, which came despite very little evidence that economic conditions have meaningfully changed in the interim.

The poll results from over 1,400 respondents are telling. Accordingly, we provide a brief discussion of the respective implications for monetary policy and the stock market.

“Trump persuaded Powell”

President Donald Trump, a self-described “low-interest rate guy”, has been openly displeased with Jerome Powell and the Federal Reserve for raising rates. To wit:

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