Let’s remind ourselves of exactly how big a policy u-turn the Federal Reserve has steered in the last three months.
In December the Fed was looking at 2 interest rate increases in 2019 and an announcement of an end to its balance sheet run off by, maybe, September.In January the outlook moved to one rate increase in 2019 and the possibility of a interest rate cut in early 2020 if the economy continued to slow. Ending the balance sheet run off of $50 billion a month, equivalent to tightening the money supply, in 2019 remained speculation.Now this week, March 20, the Fed has announced no interest rate increases for 2019 at all. An end to the balance sheet run off in September. And a definite willingness to consider an interest rate cut in early 2020 to support a slowing economy.
The Fed has thrown just about every bit of flexibility it has on monetary policy into the ring. If the U.S. central bank was as committed to patience in a state of economic uncertainty, you’d think they would have kept one interest rate increase in the toolbox. And then announcing a date certain for the end of the $50 billion a month in run offs from the balance sheet (which is the result of seeing Treasury bonds in the portfolio mature and then not buying new Treasuries to replace them)? In September? That’s the kind of “let’s throw every at the problem” action that makes you wonder what the Fed has seen to spook it so badly.
I’m left wondering if the Fed is seeing something in its data that makes it worried that a recession is more of a danger than it seemed back in December, or that a recession might be closer than everybody except a few outliers on Wall Street expect?Or maybe not.Maybe the Jerome Powell led Federal Reserve has simply panicked into a bad policy decision.
It’s hard to tell. Certainly if this were the Fed of Ben Bernanke or Janet Yellen, where the messaging was stable and policy telegraphed far, far in advance, I’d say the odds are that there’s something bad lurking in the data.But this isn’t the Bernanke or the Yellen Fed. This is the Jerome Powell Fed and he’s only been in the chair at the central bank since February 2018. I can’t point to any big obvious errors that the Fed has made in that 13 month tenure, but my impression from watching how Powell has navigated the relationship with President Trump, from noting that policy statements seem even vaguer than usual, and from the fact that the Fed has now surprised financial markets twice with policy changes in the last two meetings is that this Fed is more subject to over-reaction than the last two Federal Reserve teams.
There is a good chance that the Fed’s words and actions on Wednesday were tinged with something resembling panic and were an overreaction to the current data. I suspect but I don’t know.
My conclusion at this point is that caution is imperative–and that part of that caution should be a reluctance, yet, to conclude that the Fed sees recession speeding down the tracks.
Although frankly I don’t know what is scarier, the possibility of a nearer than expected recession or the thought of a Fed that can’t be relied upon not to disturb the financial waters.
