The Fed Capitulated Today, The Market Believes: Did The Fed Intend To Send That Message?

It’s hard for me to see the Federal Reserve’s statement today after the meeting of the Open Market Committee, and then Fed chair Jerome Powell’s presentation at the most-meeting press conference, as anything other than capitulation to the financial markets.

Back in December the markets pitched a fit at the idea that the Fed might pursue its indicated policy of raising interest rates two or three times in 2019–and today Powell and the Fed said that they don’t want to rock the boat. The market doesn’t have to worry. And as an indication that the financial market got the message, the yield on the two-year Treasury, the maturity most sensitive to Fed moves, fell 4 basis points, a big move for a Treasury, to 2.53%.

The Fed also added a strong indication that it was worried about raising interest rates because of weakness in the global economy. A long time ago–2018–the Fed was telling financial markets that while it was monitoring trends in the global economy, it wouldn’t let slowdowns in other economies drive Fed policy. But today Powell noted that the Fed was worried about slowdowns in the Chinese and German economies. Weakness in those economies would inform Fed policy.

Bloomberg reporter Rich Miller gave Powell a perfect opening at the press conference to slap down Wall Street speculation that the next Fed move would be an interest rate cut. But Powell didn’t. Instead he dodged Miller’s question: Could “future adjustments” mean a interest rate cut? Given the opportunity, Powell didn’t rule out the possibility.

It’s hard to see anything in today’s performance that might act as a curb on Wall Street enthusiasm. And with Wall Street convinced on past experience that it’s bad investing to “fight the Fed,” slowing earnings growth, weakening in the Chinese economy, the prospect for another government shutdown don’t really matter, right? They aren’t reasons for caution but instead grounds to expect the Fed to skip right past another rate increase to an interest rate cut.

The only caveat I would add is that on past performance Powell isn’t the best communicator to sit in his position at the Fed in the last decade. He said more than he meant in December–leading to the market tumble that seems to have unnerved the Fed–and spent the days after the Fed meeting organizing a round of speeches from Fed officials walking back Wall Street’s “interpretation” of his comments.

There’s the possibility of that after today’s performance too. It is quite possible that the Fed chair didn’t intend to offer so much interest rate “red meat” to the financial markets. And there is a chance that the Fed will try to talk back some of the more extreme speculation that follows on today’s press conference.

I don’t know whether that kind of talk would have any effect now that the market has heard what it wants to hear. And especially not when it believes that it has put the Fed into a defensive crouch.

I think “Don’t fight the Fed” says that U.S. stocks will go up until the Fed does something concrete to convince the market that it has a backbone and won’t be cowed by a drop like the market delivered on December 24.

I would point out that the Fed doesn’t meet in February so the next chance that it has to do anything–as opposed to talking  about what it might do–isn’t until March 20.

Today pricing in the futures market indicates no more interest rate increases in 2019.