The Fed left rates unchanged this week, as expected and had one of the more dovish statements and subsequent press conferences in recent years. The S&P 500 closed 1.5% higher than the previous days close, the Dow closed 1.7% higher and the NASDAQ closed 2.2% higher. Fed funds futures have now begun to price in a rate cut, putting the probability of a rate hike in 2019 at 0%. This is a huge shift, although the Fed did signal on Wednesday that it was done tightening for now and left open the possibility that its next move might be a cut. Market watchers have called this turnaround by the Fed “abrupt”, but markets do not get an official communique from policymakers’ every day so it may not be the Fed that has turned on a dime, but the markets. It is 6 weeks since Jay Powell and the FOMC said it was on course for “some further gradual increases’’ in rates, which may not have seemed so abrupt if they did daily or weekly policy updates publicly, but they do not. The Committee still believes 2019 will see solid economic growth, a strong jobs market, and inflation near its goal, but referenced slowing global growth, tighter financial conditions, and various geopolitical issues, including the U.S.-China trade war and Brexit.
It is now on the White House and officials from Beijing to settle the only one of these issues they have direct control over, and that’s the trade war. While it may look like Powell and the FOMC cave to the President’s comments on the prior direction of rates, data has slowed dramatically especially overseas data and recession risks have gone up. That is quite simply the definition of “data dependent”. Powell took this speculation on again in his press conference by saying, “We’re never going to take political considerations into account or discuss them as part of our work,’’. Geopolitics can affect economics. When asked what he would need to see to resume rate hikes, Powell said “I would want to see a need for further rate increases, and for me, a big part of that would be inflation,’’. That won’t happen in the short-term without the first step of a U.S./China trade deal. Your move, Mr. President.