Last Week Today. Trade talks between China and the US resumed in Beijing and were extended by a day (viewed as a positive). | Saudi Arabia’s oil minister vowed to “stabilize” the market. | The Fed’s minutes from their December meeting articulated a cautious shift toward further interest rate hikes. | The U.S. Government shutdown is now the longest in history.
Following the worst December for domestic stock market performance since the Great Depression in 1931, equity markets have spent the past two weeks in rally mode. Domestic, international developed and international emerging market equity indices are up 3.5% – 4.0% thus far in 2019 as investors wrestle with whether markets were knocked down enough in December to balance a multitude of known risks, including slowing growth in China, international trade tensions, slowing growth in the U.S., and the government shutdown. While the rally has certainly felt better than the endless drubbing markets took in December, now is not the time to let your guard down. Much remains to be resolved both here at home as well as abroad.
For detailed weekly, month-to-date and year-to-date asset class performance, please click here.
The Strange Case of the Fed’s Dr. Jekyll and Powell’s Mr. Hyde. Comparing Fed Chairman Powell’s comments at the press conference following the Fed’s December meeting and the FOMC minutes from that meeting, one might conclude that the Chairman has a bit of a split personality.
During the press conference on December 19th, Powell struck an almost defiant tone regarding more restrictive monetary policy. He used terms like “autopilot” to describe the runoff of the Fed’s balance sheet and suggested “some further gradual increases” in rates were forthcoming. All in all, his comments were viewed as stubbornly inflexible in light of the turmoil in the financial markets as stocks, which were already down 13% from their September highs, declined another 1.5% the day of Powell’s press conference.
By contrast, the minutes from the FOMC meeting published last week, revealed a far more docile view on monetary policy:
- The FOMC was preparing to pause rate hikes: “Against this backdrop, many participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming.”
- The Committee was paying attention to the selloff in stocks: “Concerns over escalating trade tensions, global growth prospects, and the sustainability of corporate earnings growth were among the factors that appeared to contribute to a significant drop in U.S. equity prices.
- The FOMC emphasized policy is not on a pre-set course: “…members agreed to modify the phrase [from the previous meeting’s notes] ‘the Committee expects that further gradual increases’ to read ‘the committee judges that some further gradual increases.’ The use of the word “judges” in the revised phrase was intended to better convey the data-dependency of the Committee’s decisions regarding the future stance of policy.
- The FOMC doesn’t believe there are many rate hikes left in this cycle: “…the Committee judged that a relatively limited amount of additional tightening likely would be appropriate.”
The contrast in tone between Powell’s press conference and the FOMC notes is distinct. Had Chair Powell’s press conference followed the script of the FOMC minutes, he could have spared equity markets from additional losses. I can think of three possible explanations for the stark difference in tone:
- Chair Powell is flustered by press conferences, and absent a well-scripted interview, he unintentionally struck a more defiant tone than he intended.
- Chair Powell was sending a message to President Trump to stop trying to influence Fed policy. In the days and weeks leading up to the December FOMC meeting, President Trump publicly criticized the Fed for even considering raising rates again. Had Chairman Powell delivered a dovish press conference, it may have been interpreted as capitulating to the President’s criticism. Under this scenario, Chairman Powell judged that maintaining the Fed’s independence was more important in the long run than the short-lived volatility his comments might have on financial markets.
- Chairman Powell accurately conveyed the Committee’s sentiment on the day of the press conference. However, in observing the market’s negative reaction, the Committee later molded the minutes to allay investor concerns.
Whatever the explanation, the FOMC meeting minutes offer us a better understanding of how the Fed is thinking about monetary policy going forward. I would not equate the Fed’s comments to a “Powell Put” as some have suggested (meaning the Fed will reduce rates at the first sign of trouble and hence there is an all-clear signal to invest in risky assets), but it is comforting to know the Fed will not blindly raise interest rates until the economy “breaks”. While the Fed may still make a monetary policy error, it won’t happen on autopilot.