Add Thursday’s remarks by New York Fed President John Williams to those of Fed chair Jerome Powell back in December and the record shows this team at the Fed is the “Gang that Couldn’t Talk Straight.”
In December Powell sent the markets tumbling when he implied that the Fed would continue to raise interest rates. He then had to walk back those comments and eventually completely reverse Fed policy on interest rates. The Fed is now looking at two to three interest rate cuts in 2019.
On Thursday Williams said that “it pays to act quickly” when the need for stimulus arises. Bond traders went into a frenzy after they interpreted Williams’ remarks as pointing to a 50 basis point cut in interest rates at the Fed’s July 31 meeting. Recently odds had moved toward a 25 basis point cut at that meeting and pricing in the Fed Funds Futures market had almost taken a 50 basis point cut off the table.
Ad then, in a matter of hours, the New York Fed walked back its President’s remarks. Williams was speaking in an academic context and his remarks were not intended to speak to Fed policy decisions at the July meeting.
Williams’ comments drove the odds of a 50 basis point cut at the July meeting to 60.2% yesterday, according to the CME Fed Watch Tool. Today those odds were back down to 22.5%. Odds of a 25 basis point cut were back up to 77.5% today after falling to jut 39.8% yesterday as market sentiment move strongly in favor of a 50 basis point cut.
The problem is that all this “mis-speaking” decreases confidence in the Fed. Already Wall Street is putting out a study or three that say the Fed is mis-interpreting the data and that the economy isn’t weak enough to require an interest rate cut. The implication is that the Fed has caved into pressure from the Trump administration.
