Authored by Richard Breslow via Bloomberg.com,
During his press conference following this week’s FOMC meeting, Chairman Jerome Powell was asked a question about what the two rate cuts that have been implemented would do for the “real economy.” And how were they meant to offset trade uncertainty and its multiplicative negative side-effects. It was a moment that came and went. Which probably was fortuitous. Because, while it was meant to be reassuring, in reality, it said nothing that should be all that comforting.
We’ve heard it all before. But the sell-by date on its validity is rapidly approaching, if not already passed, expiry. An odd thing to say, perhaps, as equity markets are likely to start Friday within shouting distance of all-time highs. Because in many ways that relentless equity market resiliency, rather than the quadruple witching hour, is what should be spooking people. The latter will likely make for a high-volume day with less significance than one would normally expect.
It’s a strange emotion to have, but with each uptick it’s hard not to get just a little bit more queasy. Along the lines of how to get rich and sick at the same time. We often bemoan the fact that monetary policy has been abandoned to be the only game in town. Well, that is how investors view the stock market. And not because they are hearing anything particularly comforting from the companies whose shares they are buying.
What did Powell say that has stuck with me? Three things.
Monetary policy works with long and variable lags. That was true when Milton Friedman was saying it 60 years ago. And back then investors were willing to be patient as it worked its way through the system. That’s not really the point of it anymore. It’s meant to prop up asset prices and if it doesn’t have an almost immediate effect, it didn’t work. You will be hard-pressed to find many corporations suddenly going to the drawing board to build a new factory.
It will help borrowers and they will be more likely to run out and buy houses, durable goods and “other things like that, cars.” Saddling consumers with more debt while we speculate on the probability of a recession is a risky strategy. Especially if there is a chance that employment strength is waning.
But the one that really got me was about the confidence channel. “The models and data show” (uh-oh) that household and business confidence turn up when financial conditions become more accommodative. I’ve yet to hear anyone say that ever since the rate decision they are feeling much more optimistic about things. This second cut seemed more like two steps back. Certainly to savers.
What we need are some wins on the matters really weighing on the global economy and not a for-lack-of-a-better-idea policy implementation. Motion isn’t always progress.
The funding squeeze continues to be a big problem. Far more unsettling to investors than credited. The Fed needs to get ahead of this. It’s of concern when there is speculation about whether it will affect next week’s, and future, Treasury auctions. This should be one of those “whatever it takes” moments, no matter if the models show that this will pass. They broke it and need to fix it.
Markets-wise, watch the S&P 500 to see if it can make its new high. It will be the most fun you’ll have all day. Seeing EUR/CHF either side of 1.10 and USD/JPY at 108 is as good a simple proxy for the day’s mood as any. Emerging markets are attempting to trading decently. And are getting a helping hand from India and China. Ten-year Treasury yields have a lot of work to do to show any hint of optimism. Getting back above 1.80% would be a start. The dollar is doing nothing, as is gold. Set some alerts and spend time elsewhere.