"You're Welcome" - Jay Powell

Choose your own lead-in:

1. I guess those stories in Bloomberg and the WSJ on Monday were leaks from the Fed…
2. If the economy is in such a good place, why do we need a 50bps cut?
3. Didn’t the Fed just say only 25bps by year end?
4. If only that 818k downward job revision had been predictable…
5. If inflation and labor risks are roughly balanced, why did you cut 50bps?
6. The odds of a 50bps cut prior to the Fed blackout were just 10%, so what changed?
7. At the last meeting, didn’t you say you weren’t considering 50bps?
8. Didn’t the Real Boss at Pensford predict 50bps?  

The Fed cut 50bps today and imply another 50bps by year end, putting SOFR at 4.30%.  Markets (and Sonora) say “bet” and put year end resets at 4.1%.  Futures markets put a 73% chance of Fed Funds below 4.25% by year end.

Next year, the Fed median projection at year end is 3.4%, with a range of 2.9% - 4.1%.

50bps was the right call today, I just don’t know how they defend the thought process that led to it.  In June:

• 8 members expected 50bps of cuts by year end
• 7 members expected 25bps of cuts by year end
• 4 members expected no cuts by year end

And now we have 50bps today plus at least 50bps more by year end?  After the last 2.5 years, maybe it doesn’t matter.  Don’t look a gift horse in the mouth and all…

Powell defended the dramatic shift by pointing out that since the last meeting, they got:

• Two employment reports
• Two inflation reports
• QCEW report - payrolls have been artificially high and will be revised down

Oh, you mean the jobs report aren’t as strong as the headlines suggest?

His general theme was that they are reducing rates to help maintain a healthy economy.  “We are calibrating policy down to a more neutral level over time.”  In other words, today is easing off the brakes, not pressing on the gas. Sound familiar?

One interesting note: the projections suggest a final landing spot of 2.9%.  That’s up from 2.5% six months ago.

But here’s what you have to remember about this - that assumes no economic slowdown.  We are heading to 3% even if we keep chugging along.  We are heading lower if things slow down materially. 

Other Powell comments:

• “Labor is in a solid position and we want to keep it there.”
• “We do not think we are behind but you can take this as a sign of our commitment to not get behind.”
• “No one should look at 50bps and say this is the new pace.”
• “Clearly labor market conditions have cooled off by any measure, but the level is still close to maximum employment.”

The next meeting is Nov 7th, and then Dec 18th.  

Rates are actually up a little bit.  The T10 is up 5bps to 3.70%.  The front end is flat, so once volatility settles down caps should benefit.  

See you at tomorrow’s webinar!