Powell Stands Pat As Central Bank Bonanza Continues

WHERE WE STAND – To coin some cricket metaphors, Fed Chair Powell was on a sticky wicket at the May FOMC yesterday, though as expected played with a straight bat, dealing deftly with the googlies bowled at him by the media.

On a marginally more serious note, it was no surprise whatsoever to see the FOMC vote unanimously to maintain the target range for the fed funds rate at 4.25% - 4.50% last night.

It was also no surprise to see a few tweaks to the accompanying policy statement, and especially the Committee acknowledging the danger of ‘stagflation’, flagging that risks of both higher inflation, and unemployment have risen, while also noting a further increase in economic uncertainty. The remainder of the statement was, largely, a ‘cut and paste’ from last time, though explaining away Q1 GDP weakness by the chunky swings in net exports was an interesting way of shrugging off poor data.

As for the main man himself, J-Pow largely stuck to his familiar script, noting that the current policy stance is ‘well positioned’ to wait for greater clarity before making policy adjustments. Powell also reiterated that if the dual mandate goals were to come into tension, the FOMC would consider how far the economy is from each goal, and the time horizon over which those goals would be achieved, before determining the appropriate policy action.

One interesting line from Powell, though, was that the FOMC “can move quickly as appropriate when things develop”. That suggests there could be a scenario where the Fed stand pat until the back end of the year, before delivering a couple of 50bp cuts to resume the easing cycle and get back to neutral. Not my base case, but something that bears consideration.

All of this, though, again unsurprisingly, serves to reinforce the idea that the FOMC remain firmly in ‘wait and see’ mode for the time being, with policymakers content to sit on the sidelines, awaiting further clarity on the economic outlook, chiefly tariffs, and greater confidence on where risks to the dual mandate lie, before taking any further steps to remove policy restriction. The direction of travel for rates is still lower, though any rate cuts before summer is out are a very long shot indeed, given the over-arching desire to ensure that inflation expectations remain well-anchored at the 2% target.

Markets, frankly, did very little in reaction to all of this – stocks bounced a little off intraday lows, though the bulk of the early rally on weekend US-China trade talks had already fizzled out; Treasuries advanced a bit, led by the long-end, though vol was relatively contained; while the same also goes for the dollar, which popped a little higher, though you’d have struggled to actually know that the FX market was open, given how subdued conditions were.

With all that in mind, I see little reason to alter any of my biases, and remain of the view that markets are trading in too complacent a manner, given the lack of concrete progress on trade deals, and huge amount of prevailing economic uncertainty. Selling equity rallies, fading upside in the dollar, and remaining long of gold, are still my preferred trades.

LOOK AHEAD – After the fun of the Fed yesterday, there’s plenty more for participants to get their teeth into today.

The central bank bonanza continues in Scandinavia this morning, though both the Riksbank and Norges Bank are set to hold rates steady, at 2.25% and 4.50% respectively. The former will stay firmly in ‘wait and see’ mode with rates set to be unchanged for the foreseeable, while the latter is likely to reiterate its prior view that rates will ‘most likely’ be cut at some point this year, though the NB probably won’t pull the trigger until H2.

Then, attention turns to Threadneedle Street, with the ‘Old Lady’ set for a 25bp cut, lowering Bank Rate to 4.25%, though at least one policymaker (likely external MPC member Dhingra) will probably plump for a larger 50bp move. The MPC are also likely to open the door to a faster pace of policy easing, most likely by tweaking guidance that further cuts will take place at a “gradual and careful” pace, and that policy must “remain restrictive for sufficiently long” in order to bear down on the risk of persistent price pressures becoming embedded.

The Bank’s latest economic forecasts, meanwhile, will likely point to a slower pace of economic growth than foreseen in February, but also to a considerably lower inflation profile, both due to a cooler than expected outturn in H1, and the disinflationary impacts of tariffs imposed on the UK economy. These forecasts, naturally, provide further support to the idea of more rapid cuts from here on in. Bailey’s presser, after all that, will likely see the Governor refusing to pre-commit to a particular path, while noting that the MPC’s focus is still on the ‘growth shock’ stemming from tariffs.

Lastly, on the Bank, today’s decision will come at 12:02pm, 2 minutes later than usual, owing to the national two minutes of silence to commemorate the 80^th anniversary of VE Day. I’m pleased to see the Bank acknowledge this in such a way. Lest we forget.