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Fed Preview: Take Powell At His Word, Rate Cut Just A Mid-Cycle Adjustment

By Investing.com (Darrell Delamaide/Investing.com)Market OverviewOct 29, 2019 11:20AM ET
www.investing.com/analysis/fed-preview-take-powell-at-his-word-rate-cut-just-a-midcycle-adjustment-200479308
Fed Preview: Take Powell At His Word, Rate Cut Just A Mid-Cycle Adjustment
By Investing.com (Darrell Delamaide/Investing.com)   |  Oct 29, 2019 11:20AM ET
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Policymakers at the U.S. Federal Reserve are virtually certain to cut benchmark interest rates another quarter point this week—to 1.5 to 1.75%—but officials will be at pains to emphasize this is it until there is tangible evidence of an economic downturn.

Fed Chairman Jerome Powell has insisted that the latest round of cuts is a mid-cycle adjustment, not the start of a downward path in rates to accommodate an economic slowdown. Likewise, he's affirmed that renewed Fed purchases of bonds are not a new round of quantitative easing, but rather an adjustment to correct a shortage of bank reserves.

Historically, a mid-cycle adjustment, such as those seen in 1995 and 1998, can be 0.75 points, which is the total of what would be three rate cuts since July. Building a buffer of bank reserves is legitimate in the wake of money market turmoil when suddenly there weren’t enough.

Still, essentially, the Fed has made not one, but two mistakes. First, it set itself on a path to raise rates in 2018, mistakenly thinking economic growth would push inflation up. And it kept on that path in the face of all evidence to the contrary—inflation was not going up despite low unemployment. Instead, the labor market continued to expand.

The second mistake was to willy-nilly start winding down its balance sheet after pumping it up with quantitative easing. In the process, it cut bank reserves in half, to $1.4 trillion from $2.8 trillion.

Turns out that's not nearly enough to cover overnight lending needs at peak periods like the one that occurred September 16-17. Economists want the U.S. central bank to add $400 billion to bank reserves and grow that in line with the economy.

Then there's U.S. President Donald Trump who's angry with the Fed because he wants them to turbo-charge the economy with cheap credit. Of course, investors have a right to be angry because the Fed keeps making big mistakes.

If policy makers are in fact able to wipe the slate clean on both fronts by reducing rates once more and restoring bank reserves to a sufficient level, can we sit back and relax? Perhaps.

But this inability to settle on appropriate policy has not contributed to investor confidence in the Fed under Powell’s guidance. This loss of credibility may be its biggest problem.

Powell needs to assert his leadership. There are members of the Federal Open Market Committee (FOMC) that question the need for further interest rate cuts in spite of trade tensions and some indications of economic softness. Maybe they could sit on their hands for once and be satisfied with forward guidance that there will be no further cuts in the immediate future. It would be so much more credible if this rate cut could emerge with no formal dissents.

Investors can help, too. Markets should take Powell at his word if he finally does have it right. Sure, even lower rates would be nice, but this should really be enough for a mid-cycle adjustment. Yes, asset purchases are asset purchases and a bigger Fed balance sheet is by definition accommodative. But this, too, is a fine-tuning of monetary policy, not a change of course.

Fed Preview: Take Powell At His Word, Rate Cut Just A Mid-Cycle Adjustment
 

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Fed Preview: Take Powell At His Word, Rate Cut Just A Mid-Cycle Adjustment

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Comments (8)
Mario Rossi
Mario Rossi Oct 29, 2019 2:22PM ET
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Market is pumped up just to guarantee trump reelection. After it it can crash 50% or more. He does not care!
John Nichols
John Nichols Oct 29, 2019 10:16AM ET
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you missed the biggest mistake of all. The biggest mistake was when our Congress created the Federal Reserve who has only steered us from one crisis to another with each one getting bigger and bigger. It is completely unacceptable for these so-called leaders to not speak the truth of their own failures.
Andrew Allen
Andrew Allen Oct 29, 2019 10:16AM ET
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Yes this article is horses hit. "mistakenly thinking economic growth would push inflation up" as if rising inflation is a good thing. Good for Fed, bad for Americans.
gary leibowitz
gary leibowitz Oct 29, 2019 9:33AM ET
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The most ridiculous article i have ever read. the stock market mistake is now up around 25% for the last one year alone.  I guess we need more mistakes.  The crazy views are common since a crazy man took office.  heck not many even know the permanent damage Trump has done. Oh but you will. Lets deal in facts. Deflation pressure is here to stay.  Cutting rates to feed the market is as bright as abandoning the Kurds.  We are near a major peak and a very long winter will come next.  be it political turmoil worldwide, climate change, record expansion of debt,lax industry rule, protectionism, or just complacency and greed.  It is so startling clear that i find it incredulous how market analysts aren't preparing for it.
Andrew carson
Andrew carson Oct 29, 2019 7:45AM ET
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His snails pace will most likely lead to zero rates.
Michael bostic
Michael bostic Oct 29, 2019 7:31AM ET
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Trump is hurting our economy wanting to borrow cheaply while debt continues to rise and our economic growth continues to slow
Noel Houck
Noel Houck Oct 29, 2019 7:31AM ET
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Massive economic frowth is the only way out of this massive debt.
Justin McNaughton
Justin McNaughton Oct 29, 2019 7:31AM ET
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Andrew Allen
Andrew Allen Oct 29, 2019 7:31AM ET
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Massive inflation is the only way out of this massive debt.there, I fixed it for you
Changyi He
Changyi He Oct 29, 2019 7:18AM ET
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A mid cycle adjustment can take down 1/3 of the existing rate and cut the rate below 2%? This is plain ridiculous. Plus US is running record high deficits which means interest rate can only go down in order to make interest payment. Imo the rate will drop to zero before 2021
Alexander Abgar
Alex2022 Oct 29, 2019 7:11AM ET
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Your first point is legit however the FED didnt forsee twiter in chief staring global trade war.
Scott Mitchell
Scott Mitchell Oct 29, 2019 7:11AM ET
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D'oh statement of today.
Uz IL
Uz IL Oct 29, 2019 6:35AM ET
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Thank you Darrell.
 
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