FOMC Recap: July 31
Good afternoon traders, that thing we all knew was happening…happened! The Federal Reserve rode in to the rescue of the American economy, whether the economy needed rescuing or not! Gold prices following the policy announcement and Chairman Powell’s press conference at sharply lower for the day, pricing current around $1412/oz in spot markets. While this is a disappointment in relation to the yellow metal’s higher prices this morning, it is broadly in line with our recent assertions that at quarter-point rate cut was already priced into the gold market at $1410.
The Rate Cut
Fed Chairman Jerome Powell and the FOMC this afternoon delivered the 0.25% cut to short term interest rates that everybody and their blind dog knew was coming. It is the first lowering of rates by the Fed since the end of Great Financial Crisis By this morning, if not the end of last week, it was pretty clear that the only reason the Fed would introduce a 50-basis point cut would be to make it clear that they would buckle to pressure from the White House. Given that such an unprecedented acquiescence would be a long-term catastrophe for the economy, it seems like everyone is relieved to see a quarter-point cut.
Additionally, the committee announced an end, today, to the runoff of the Fed’s balance sheet. That ledger had been inflated by QE following the financial crisis and allowing its bond holdings to roll off contributed a mild amount of tightening to monetary conditions in the US. The runoff was originally planned to conclude in September; the Fed is clearing closing the door now to ensure that the easing impulse of the rate cut isn’t undermined by a cross-current of the central bank’s own doing. It’s not a terribly important announcement, but I do think it’s supposed to do some messaging on the FOMC’s behalf.
I’ll come back to that later.
The FOMC’s careful prepared statement, with the obvious exception of announcing a rate cut, didn’t vary materially from the language in June. While doing the typical song and dance about concerns around persistently sluggish price pressures though, the committee did reinforce the recent narrative that despite a still-healthy US expansion the slowdown elsewhere in the world in a factor in this move, saying:
“In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the committee decided to lower’’
Whether that’s meant to suggest that looming economic struggles outside the US could be a pressure on the American economy that the Fed is wary of, or just that it’s a viable straw man to blame for easing that the market or the White House demands…well, that’s up for interpretation.
The other notable information from the statement was the specifics about what is the first 9-2 split of Chairman Powell’s tenure.
LATEST: Kansas City Fed President Esther George and Boston's Eric Rosengren voted against the rate cut.
It was the first time since Powell took over as chairman in February 2018 that two policy makers dissented.https://t.co/7O7xRhKi4N
— Bloomberg Economics (@economics) July 31, 2019
What I would say is meaningful here is that both dissenting votes preferred to leave rates unchanged. So the question is: if there were no FOMC voters clamoring for a deeper cut this month, is that because the committee feels this move is enough? Or have they all accepted that there will be another cut before the end of the year?
The Press Conference
It was hard not to feel a little bad for Chairman Powell during the press conference. Every question—well, every intelligent question, at least—seemed focused on getting the Chair to explicitly say if the Fed was planning additional cuts this year or not. Powell opened the presser with his own statement, describing the developments since June’s meeting that he and the committee felt warranted today’s action:
Powell describing data since June:
-jobs report "strong," expects slowing this year
-GDP growth "close to expectations"
-Business fixed investment "fell"
-Cited concerns in Euro area, China
-Trade tensions at a "simmer"
— Brian Cheung (@bcheungz) July 31, 2019
Chairman Powell took his battering but did avoid showing his whole hand; explicitly, at least. The tone of most of the Chairman’s responses seemed to indicate that the committee is technically open to the idea of an additional cut if necessary but that they are inclined to avoid it if at all possible. I was the most surprised by Powell’s continued assertion that the FOMC’s gradual transition to this more dovish stance, and not just today’s rate cut, is what has really been providing support to the US economy (“supporting the US economy” is not all but confirmed as a third mandate for the Fed under Powell.) This comment, in particular:
Highlight: Why 25 basis points, why not more? “I don’t think asking about a quarter point is really the right question,” says Fed Chair Jerome Powell. Instead, watch the Fed’s recent moves, he explains: pic.twitter.com/ytTBTmUz3Y
— Yahoo Finance (@YahooFinance) July 31, 2019
Powell also, more than once, described today’s move as a “mid-cycle adjustment.” That may not necessarily be Powell-speak for “one-and-done insurance cut” but it’s certainly a clear statement that we’re not entering a full-on easing cycle.
What’s Next for The Fed and Gold Prices?
Sorry to disappoint, but at least for this afternoon it’s hard to say for certain. My “this is very much not investment advice” view of things is that the bar for another rate cut is a pretty high one for as long as the US economy continues at its current pace. The market seems to be pricing that in as well:
Futures traders are pricing in less easing for the rest of this year after the Fed cut its benchmark by a quarter point https://t.co/iIV5w9CkpY
— Bloomberg (@business) July 31, 2019
In terms of gold, I think price is broadly supported at $1400 and while it seems certain that the market and the economy won’t stay in the same place for too long it’s basically a coin-toss, at this moment, to predict which way things will go. Luckily, we’ll start to get some color pretty fast, with Manufacturing PMI tomorrow and the all-important Jobs Report Friday.