(Reuters) - Federal Reserve Chairman Jerome Powell on Tuesday said the U.S. central bank is “insulated from short-term political pressures,” as policymakers faced new calls by President Donald Trump to cut interest rates.
STOCKS: S&P 500 initially drops to session low, last down about 0.50% on the day, Nasdaq down by 0.87% [.N]
BONDS: 2- and 10-year Treasury yields briefly tick up from near session lows. 10-year yield just below 2%; 2-year yield back near 1.73% [US/]
FOREX: The dollar index briefly ticks higher but is back to levels before Powell’s remarks, up 0.12% on the day
STAN SHIPLEY, FIXED INCOME STRATEGIST, EVERCORE ISI, NEW YORK:
“I think Powell here is telling you that they are on the brink of easing, when he said that the Fed sees the need for more accommodation. That’s pretty clear that outside of getting better economic data and probably higher inflation too, they will ease in July. The problem is that the market has gone much faster than he is. The question here is how bad will economic data have to be for the Fed to go 50 basis pints because this morning’s data was poor. And when he sits down with his staff, they’re not going to be optimistic here.”
ALAN LANCZ, PRESIDENT, ALAN B. LANCZ & ASSOCIATES INC., TOLEDO, OHIO:
“He did pretty much confirm what the consensus was, but we’ve had a very nice move in June so a little bit of profit-taking does make sense.
“There wasn’t anything really material or unexpected that I think would change directions. It seems like interest rates will be lowered and this environment will stay, and that’s positive for stocks in comparison to many alternatives out there.”
MARY ANN HURLEY, VICE PRESIDENT, FIXED INCOME TRADING, D.A. DAVIDSON, SEATTLE:
“I think Bullard’s comments are the most telling because he is the most dovish member of the committee. Not even just the committee, he’s the most dovish member of the whole Federal Reserve council. He basically took 50 basis points off the table. While the market was still expecting 25 basis points more so than 50 at the July meeting, the fact the he doesn’t believe in 50 basis points, that the current situation warrants it, I think is very, very telling.”
“To me, Powell is just reiterating what he has previously said, what we know. They are going to be monitoring the situation, so on and so forth, they are going to do what is needed. I think that maybe except for a comma or two, I’m not sure he’s really said anything new. But Bullard, he’s the most dovish member of the committee. It would not have surprised me if he had come out and said, yes I think 50 basis points is warranted. So the fact that he outright says that the conditions do not warrant it at this point, I think is very, very significant.”
RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, NEW VERNON, NEW JERSEY:
“For people who are counting on an aggressive easing policy he continues to make it clear they don’t have an aggressive easing policy.”
“The market at these levels is really looking at two issues that push it higher. One is the trade agreement and the other is Fed policy. It’s really trade policy that’s going to be more meaningful. When rates are this low, if they’re going to be a little lower its probably not going to provide some real upside to the market.”
“Part of the problem is that if the Fed is cutting rates investors should assume the economy is weakening. Any fed cut is always a two edged sword.”
“It’s interesting he chose to speak out on the political issue. For some investors they want to see an independent Fed. That matters to people who feel it protects U.S. economic interests. It isn’t really a surprise he said it.”
“It’s very typical of the Fed to offer middle of the road shifts to their last statement. All it shows is that he’s continuing the policies that have gone on for the last several years.”
“The big big shift was earlier this year. Since that point they’ve just maneuvered around the middle … A lot is in the hands of the administration and what they do on trade.”
CHAD MORGANLANDER, SENIOR PORTFOLIO MANAGER, WASHINGTON CROSSING ADVISORS, FLORHAM PARK, NEW JERSEY:
“(Powell) doesn’t seem to be giving an indication that the Fed’s going to aggressively drop rates by 50 basis points in the next go-round. The debate has been whether it will be a quarter-percent or a 50 basis-point cut in the next two months. I think he’s signaling to the market that he’s going to hit the quarter-point rate reduction and then wait. This type of message, that the Fed will be accommodative but not as accommodative as people thought, is not what the market was hoping for. So the market is reacting a tiny bit, but it’s nothing to worry about.”
JUAN PEREZ, SENIOR CURRENCY TRADER, TEMPUS, INC., WASHINGTON:
“He never doubles down on negativity, despite agreeing that the economy could use some help via central bank intervention. Powell wants to wait and see because he admits changes have been very rapid. Euro above $1.14 isn’t unrealistic, but dollar weakness will not be sustained just by Fed fears, but by good data elsewhere, and there’s no consistency in that.”
“He’s trying to not over-react to short-term data and stress the fact that the Fed doesn’t want to over-react to short-term data. And so acknowledging heightened uncertainty but not being sure yet whether that implies action at the next FOMC meeting.”
“Prior to Powell’s statement were comments from Bullard saying that he does not think that a 50-basis point cut at the July meeting would be warranted at this point. That’s the same person who a week ago said that we definitely needed a 25-basis point cut now.”
“At a time when Powell is trying to clear up uncertainties, the Fed seems to be adding to them each time they speak.”
The stock market “initially weakened on Bullard and I don’t think that Powell is providing any more clarity. Powell’s comments aren’t sufficient to strengthen it after what Bullard said.”
ART HOGAN, CHIEF MARKET STRATEGIST, NATIONAL SECURITIES, NEW YORK:
“You have a conundrum here and the conundrum is monetary policy has to come to the rescue of trade policy. That is clearly evident, the reason the Fed has leaned dovish is because trade policy is causing economic slowdowns both domestically and globally. To the extent that is the case, if you are the Fed you also have to at least acknowledge what is causing the drag in both the economic activity and inflation expectations.
“You had a one-two punch. Jay Powell came out and warned against policy bending to short-term political interests but it is also Bullard, who is a dissenter, saying 50 basis points would be too much.
“It is just a function of getting expectations calibrated appropriately to where we should be. Everyone felt like the June meeting was so dovish that the July meeting is a lock and it’s not.
“What happens before the July meeting - you get the G20 and maybe that goes well, you get another jobs number and maybe that is better than last month, you get GDP for the second quarter and maybe that is better than expectations. To sort of sit back and say there is a 100% chance of anything which the Fed funds have been saying about the July rate cut is just getting ahead of yourself. To me, this is just the market trying to calibrate what our appropriate expectations should be and did we get ahead of ourselves.
“All of this goes away if we can smooth a glide path to a trade deal with China. There are all sorts of things that could start sounding better in trade. But here is the conundrum, the better that sounds, the less likely the Fed is to cut. And would you rather have a trade deal that actually spurs economic activity or would you rather have the Fed feel like they have to cut a couple of times before the end of the year. To me, I’d take the former and that is what the market is just trying to juggle right now and why it had this little quick rollover.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:
“He’s saying we can’t cave in to political pressure. If they did and they made a mistake the Fed would lose credibility … Bullard also said cutting rates by 50 basis points would be over doing it.”
“These comments suggest that the Fed is in no rush to lower rates. The market is reacting to both of them.”
Americas Economics and Markets Desk; +1-646 223-6300