Of All The Recession Risks, Stubbornness At The Fed Might Be The Biggest

The Fed left rates unchanged, but communique from the dot plot to economic projections to the Jay Powell conference did.

The dot plot shows a big move toward easing. However, it’s not an overwhelming consensus as two members are still on the fence regarding two cuts. And one is on the fence about one rate cut this year.   Conversely, James Bullard bolted from his peers, voting for a rate cut yesterday. 

The official statement removed the word “patient,” allowing the Fed to act at the next gathering in July (Wall Street sees 100% probability there will be a rate cut).

While Powell mentioned trade risk, he also talked about the global economy, which has been a worry for the Fed for more than a year. Ironically, he defended the European Central Bank (ECB) for looking out for their domestic economy. Many found that comment strange since his hikes last year worked against the U.S. economy.

More curious is the sharp decline in personal consumption expenditure (PCE) inflation for this year to 1.5% from 1.8%. Powell remarked that declining inflation can build momentum and get to the point where it’s “difficult to arrest.” Heck, it looks as if we are on the cusp of such a scenario.

Too Defiant?

“I intend to serve my four-year term.”

-Jerome Jay Powell

It’s a question the Federal Reserve chairman has answered numerous times, even during a 60 Minutes interview. However, he was asked about reports that President Trump was looking for ways to demote him. While it’s the kind of juicy stuff that could get the Federal Open Market Committee (FOMC) mentioned on TMZ, the questioner knew the answer and was seeking controversy.

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I know Powell is angry. By the same token, many observers think the Fed made a huge mistake with that December rate hike. Even yesterday, he gave certain mixed messages. I bet he would like to head the Fed for more than one term. He can get there by making sure there’s no recession, or he could get there with a clumsy product and policy messaging - and the chance a different president would keep him on.

I think the Powell Fed will work hard to stave off a recession, but there is also a feeling they don’t want to be pushed around. Out of all the risks mentioned yesterday, stubbornness at the Fed might be the biggest. 

Creeping

Major equity indices climbed toward the all-time high, although the action was tempered as the Street continued to analyze Powell’s comments and what it means for investing. The best performing sectors were Health Care and Utilities. 

Portfolio Approach 

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Today’s Session

Data in this morning was mixed.  The jobs picture looks good and remains tight.  Initial claims dropped 6,000 to 216,000 from prior week’s unrevised 222,000.  The 4-week moving average, a better gauge, increased 1,000 to 218,750. The previous week’s unrevised.   Continuing claims declined 37,000 to 1,662,000 while the prior week was revised to 1,669,000 from 1,695,000.

Conversely, the Philly Fed data for June was a big disappointment coming in at up 0.3%, the lowest read since February, and way below the estimates for an increase of +9.3%.  New Orders, current shipments and employment also declined from May, but were still positive. Of the respondents, nearly 25% reported increases in employment.  

The price indexes point to moderation in pricing pressure and the future indexes suggest that respondents “continue to expect growth over the remainder of the year.”