The Powell Put in Action

The January 30th FOMC press conference was greatly anticipated by market participants, generally looking to see how dovish Powell could get in the light of uncertain financial conditions and signs of a global slowdown.

This is a recap of last meeting:


Powell starts off his conference indicating that the “economy is in a good place” and the “jobs picture continues to be strong”. While noting that “over the past few months we have seen some cross-currents and conflicting signals about the outlook”. He took note of the slowing growth in China and Europe while indicating elevated uncertainty surrounding Brexit and the US-China trade negotiations, pointing to surveys of business and consumer sentiment which have “moved lower”.

He goes on to state that “we are now facing a somewhat contradictory picture of generally strong U.S macroeconomic performance, alongside growing evidence of cross-currents”. The conclusion being that the Fed can adopt a “patient, wait-and-see approach regarding future policy changes”.

Particularly he noted “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”. The key word being adjustments, which could mean increases or decreases to the FF rate.

“The case for raising rates has weakened somewhat”; Indeed, Powell does watch the S&P. His basis being that inflation expectations have dropped primarily due to the price of Oil declining in recent months.

The Balance Sheet:

He notes that “Over the past three meetings, the FOMC has held in-depth discussions on the final stages” of balance sheet normalization. Stating the importance of an “ample supply of reserves”.

He firmly indicated that they will continue to use the FF rate as their primary active tool for monetary policy and to continue using the balance sheet passively with opportunities to change the procedure as conditions warrant.

Stating that the ultimate size of the balance sheet will be principally determined by financial institution’s demand for reserves (plus a buffer), he goes on to note that current estimates of reserve demand are “considerably higher” than estimates from a year prior. This is an indication of an increased demand for liquidity by financial institutions. As a result this means that normalization “will be completed sooner, and with a larger balance sheet, than in previous estimates”.

He finishes he speech concluding that “the Committee is now evaluating the appropriate timing for the end of balance sheet runoff” and they would be “finalizing these plans at coming meetings”. He re-affirms that the FF rate is their main active monetary policy tool but that if economic conditions warranted it they would adjust balance sheet procedures. He says that the FOMC recognizes that the economy could “again” present conditions where FF rate policy is insufficient, in which case they would resort to balance sheet policy.

Question Time:

When asked if monetary policy was still accommodative or not and if so then “how do you justify the removal of the need for further rate increases”:

Powell has backtracked on his statements of monetary policy being accommodative stating that he thinks current policy is “appropriate right now” and that the policy rate is now “in the range of Committee’s estimates of neutral”. Clearly the Committee’s estimates of neutral have been lowered as financial conditions have tightened.

When asked if the FOMC agrees with the IMF’s statement that risks are skewed to the downside. He notes that present risks to the baseline are; tighter financial conditions, slowing global growth, Brexit, and trade discussions. Stating that they need to use policy to offset those risks. The real question is how he weighs those risks individually in determining policy.

He states in one answer that they believe that the stated risks/cross-currents “are going to be with us for a while”. Re-affirming that they can be patient and there is not need to make any rushed judgments.

Powell may have taken a page out of Silicon Valleys book as it looks like he is trying to run the FOMC in a Lean manner. When questioned if “Adjustments” means that down is as likely as up he states that “were not making a judgement. We will patiently wait and let the data clarify”. He states that he is looking to see those crosscurrents “clear up” before making major policy decisions.

It will be interesting to see what his language looks like in the FOMC minutes this Wednesday.


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