So there is a bias if
you’re a Fed watcher. You want big, exciting
things to happen because it gives you something
to talk about and something to write about. That did not happen today. In July, the Fed offered
a 25 basis point cut. And then they said,
look, we don’t know what’s going on
with trade uncertainty. We’re a little worried about it. Things look fine, but we’re
watching very carefully. On Wednesday they offered
another 25 basis point cut, and then they said,
eh, we’re good. There’s a strange thing
happening, particularly with trade uncertainty
where the Fed seems to be actively talking to people
in the business community. They’re telling it that
they’re delaying purchases because they don’t
know what’s happening with trade negotiations. The Fed Governor’s
Board has in fact modelled this and
determined in a paper that they published in August
that trade uncertainty delays business purchases. That could put a drag on
economic growth by as much of a full percentage point
over the course of 2020. So that’s a big deal. But then when you get to the
actual projections in the dot plot, which we got today the
median dot said, we’re good. We’re not going to
give you another cut before the end of 2020. So what is going on? Most economic data continues to
be good, pretty much everything except business investment,
except this concern over trade uncertainty. It’s been pretty strong
for the entire year that we’ve been seeing business
investment and manufacturing decline. So we have further proof
that perhaps this is just a manufacturing recession,
something to watch carefully, but not something
to freak out about. There also seems to be some
disagreement within the Federal Open Market Committee. In July, we had two dissents. They were both hawkish dissents. Esther George, Eric Rosengren,
they’re both Fed presidents, said, they thought the
Feds should stand pat. They did that again this
time, but then there was also a dovish dissent. Jim Bullard, president
of the St. Louis Fed, said it should have been
a 50 basis point cut. Jim Bullard has been
the most prominent voice arguing for increased concern
about trade uncertainty. So there you have it
– you have this idea. They’re researching it. There’s one voice that’s
arguing strongly for it, but it doesn’t seem to
be swaying the committee. The committee itself is divided
and waiting to see what else happens. It’s not really a surprise that
the committee is so divided. One thing that Jay Powell
said when he gave his policy speech at Jackson
Hole in August was that we are in a new era
of monetary conditions. We’re in an era of low
interest rates, which he calls the monetary policy
challenge of our time. We’re in an era
of low inflation. America has the easiest time of
all the other major developed economies right now. We seem to have
pretty good growth. We seem to have slightly
higher interest rates, but it’s a problem all over. Let me just say, on the general
point of diverse perspectives, you’re right. Sometimes and there have
been many of those times in my now almost eight
years at the Fed, many times on the
direction, I was relatively clear it’s relatively
easy to reach anonymity. This is a time of difficult
judgments, and as you can see, disparate perspectives. And as I really do think
that’s nothing but healthy. And so I see a benefit in having
those diverse perspectives, really. So it is a time of
difficult judgments. It’s hard to figure
out what’s going on with trade uncertainty. It’s hard to figure out
the effect that that’s going to have on growth. It’s hard to figure out
whether a very clear, invisible manufacturing recession
is going to turn into a more general recession. So there is justifiable lack
of clarity on what’s happening. And it makes sense
then that there would be a lot of
different voices that the Fed trying
to figure that out. Ultimately, they came
to a decision this time. But they seemed to
communicate we don’t really know what’s going on yet. We’re still watching. We’ll help out if we need to. As we know, there was a
disruption in overnight funding markets on Monday and Tuesday. Repo rates,
repurchase agreements, short-term funding spiked to
as much as seven per cent. That’s a very high number. The Fed needs to address
this, and they did. But they did it in the
most minimal way possible. Their attitude seems to
be, “First do no harm.” The broad problem is,
that as the Fed ran down the asset side of
its balance sheet, the liability side of its
balance sheet ran down, too. That’s basically bank reserves. It’s composed of a couple
of different things, but bank reserves is
a massive part of it. These are things
that, this is money that the Fed keeps on reserve
at the Fed in case they need it. The Fed has said
to conduct policy, it wants to be in what it
calls an ample reserve regime. They want to have extra
reserves at the bank just in case anyone needs them. They don’t want to get
down to a minimum level. Now, they didn’t know
what the minimum level was until this week. In 2014, they had $2.9tn
in reserves at the Fed. This week, they had $1.3tn. They basically thought,
OK, when we get down in the minimum
level of reserves, we’re going to notice
that we’re there because we’re going
to see disruptions in the overnight funding market. That is what we saw this week. So the Fed has to address it. As with the other things that
they talked about today, as with the other things that
Chairman Powell talked about today, they did the
least they could possibly do to say, look, we’ve
got this for now, and we’re watching, right? So they made some very
small technical tweaks in how they managed
the policy rate. They didn’t promise to
run up reserves again by buying more assets. And they didn’t say that they
were going to put together a more regular, a standing
repurchase facility, which is something that they
had talked about doing. It’s something they actually
had to do on Monday and Tuesday. They didn’t commit to that. They didn’t even mention
it this time around. So given all that
they might do, they did the smallest thing
they could do while they watch and figure it out. And that seems to be where
the Fed is right now. A lot of things are changing. A lot of things are weird. We’re just going to
watch for a little bit. Give us a month. We will come back
to you in October.