Some investors argue that Powell wasn’t forceful enough in committing to bolster price growth as he struggled to articulate the reasons behind the interest-rate cut in the question-and-answer portion of the press conference. “They’re refusing to address inflation expectations right now,” Bob Michele, head of global fixed income at JPMorgan Asset Management, said in a Bloomberg TV interview. “We’re going to sit on the long end of the curve and watch growth and inflation decline and enjoy the ride.”
Even President Donald Trump has latched on to the idea of low inflation as a reason to implore the Fed to further ease policy. On Wednesday, he reiterated there’s “no inflation,” in part of the same post on Twitter in which he bemoaned that “as usual, Powell let us down.”
....As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place - no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!
— Donald J. Trump (@realDonaldTrump) July 31, 2019
Now, TIPS and inflation expectations don’t exist in a vacuum, and the fact that crude oil futures slumped on Thursday by as much as 3.5% certainly played a role in compressing breakevens. But even there, it’s worth considering the culprit: A stronger U.S. dollar. That, too, runs counter to what the Fed was probably aiming for with its interest-rate cut. In fact, The Wall Street Journal this week posited that the European Central Bank’s shift to even-easier policy forced the Fed’s hand, in what was dubbed “the undeclared currency war.” In his opening remarks, Powell noted that “many central banks around the world are increasing policy accommodation or contemplating doing so.”
Looking at the movement in the two macro markets most directly sensitive to Fed policy — rates and foreign exchange — it’s hard not to draw the conclusion that traders are protesting the Fed’s policy path. On top of the moves in currencies and yields, as Bloomberg News’s Stephen Spratt reported, borrowing dollars has become even more expensive lately, which is beginning to cause a squeeze in global money markets. That certainly wasn’t what Powell was hoping to achieve by easing.
How long this tantrum lasts is anyone’s guess, but as I wrote yesterday, bond investors have gotten what they wanted time and again this year from the Powell Fed. Whether the Fed is truly on the verge of a policy error, or just not living up to market expectations, may wind up being an entirely irrelevant distinction. With that in mind, it’s hardly a surprise that traders expect they’ll win out in the end.
This column was provided by Bloomberg News.