The Federal Reserve got a lot of attention today for putting out a statement changing its previous promise that it would be “patient’’ before cutting interest rates — even as it declined to cut rates now. Whoopee!, social media cried, in a reaction I may exaggerate slightly. They’re gonna cut and cut and cut!
And then Fed Chair Jerome Powell gave a strong press conference, where he demonstrated what patience really means. And suggested, contrary to a lot of commentary that seized on the statement’s signs of dovishness, that maybe rate cuts aren’t as automatic as the market thinks.
Instead, he pointed out that the most-recent data is actually quite a bit better (just in the last week, really, led by June 14’s retail sales report) than what had gotten traders so riled in May. He noted that consumer spending is 70% of the economy, and that the service sector is strong, while manufacturing is weakening thanks to pressures on trade that he was too polite to point out are President Donald Trump’s fault.
And so the Fed is waiting to learn more.
Which is — what’s the word? — patient.
Also the right thing to do.
“Risks to the baseline scenario have clearly risen, but it’s important that monetary policy not overreact,” Powell said. “We take cross currents as a given.”
The argument here has long been that signs of a feared end to the 10-year old expansion are exaggerated, with recession odds very small this year. Even next year, a downturn more severe than a return to the trend of long, slow expansion isn’t as likely as a reversion to form.
There’s just not a big problem out there to break the trend: Consumer balance sheets are fine, the job market is in decent shape, and there’s basically no inflation to be found.
All of this is letting middle-class families slowly recover some of the opportunity lost when median inflation-adjusted household incomes fell 10% between 2007 and 2012. Even though that loss was recouped by 2017, that meant basically 10 years of scrambling just to get back to the same place.
That the economy should be given room, before rates rose, to recoup some of the lost time (as well as the nominal lost income) was a bold stance when Fed Chairs Ben Bernanke and especially Janet Yellen took it, but it’s common sense now.
The Fed isn’t foolish: It sees the signs of weakness in business investment in the second quarter, especially in manufacturing. It also knows that there are two or three big causes, which Powell cited.
One is concern about weakness overseas, overall, which Powell noted may be partly due to China trying to reduce its debt load and growing more slowly. Another is cheaper oil cutting into investment — but, Powell noted, cheap gasoline means consumers have more money to spend on other stuff.
The other is risks to global supply chains, he said. What he did not say is that the No. 1 threat to those is the president.
The biggest international supply chain is the web of suppliers of auto parts and cars spanning North America, and Trump’s threat to slap tariffs on that commerce has been delayed, if not ended, by June 7’s deal between the U.S. and Mexico. In which Mexico made vague promises to try to stop Honduran refugees walking through Mexico from trying to reach the U.S, an issue important to the president that has little to do with trade.
In other words: If Trump shuts up for a while, things will probably be fine. Let’s see.
The Fed’s tracking data for mid-2019 support this. The Atlanta Federal Reserve Bank’s GDPNow tracking forecast calls for 2% second-quarter growth — up from 1.2% three weeks ago, mostly due to the retail sales report. The New York Fed is less optimistic — they forecast 1.4% based on second-quarter data so far — but that’s up from 1% on June 7.
Clearly, the retail sales report did a lot of work on the Fed’s thinking. But as the man said, consumer spending is 70% of the economy. And Trump has gone quiet since the Mexico deal.
In the background, other Fed officials are lurking in the anonymous details of the Fed’s economic projections. Eight of 17 voting and non-voting members of the Open Market Committee projected that rates will fall by December, most of them thinking two or more cuts will happen.
So a slightly less nervous market — the Standard & Poor’s 500
and Dow Jones Industrial
have just about recouped the highs they made last year before Trump turned up the trade rhetoric — is trusting them to step in to cut rates if needed.
But they may not be.
“Ultimately, the data will prevail,” independent economist Joel Naroff said Wednesday. “If the economy is as decent as I think it is, it will be hard for the Fed to cut rates without further declines in inflation, even if a growing number of members are no longer patient.”
But, there’s using the word patient. And then there’s showing what patience is. The Fed just did the latter.