Market Insider

Powell aces tricky Fed transition to ending interest rate cuts, doing '100% the right things'

Key Points
  • The Fed gave markets exactly what was expected, when it cut rates by a quarter point and guided investors to expect it will pause its rate cutting unless the economy weakens.
  • Fed Chairman Jerome Powell reaffirmed that message in his briefing and signaled the Fed is not expecting to cut or raise interest rates for some time.
  • The Fed chair, who has been criticized for communications blunders, got high marks from market pros for making a difficult policy transition, that was not expected by all market players.
  • BlackRock's Rick Rieder said Powell was doing a "great job" and he did "100 percent the right things."
Federal Reserve Chairman Jerome Powell holds a news conference following a closed two-day Federal Open Market Committee meeting in Washington, September 18, 2019.
Sarah Silbiger | Reuters

If the market was giving out grades, Fed Chairman Jerome Powell would have aced his handling of a difficult policy transition, from cutting interest rates to doing nothing at all for what could be a long time.

Unlike other meetings, the Fed chairman delivered no gaffes that sent markets reeling, something that had been expected by some market pros.

The Fed cut its fed funds target rate Wednesday to 1.50% to 1.75% in its third quarter point rate cut in so many meetings. It also made a critical language change in its statement, signaling it was stopping rate cuts for now. The Fed dropped the phrase that it would "act as appropriate" to sustain the recovery, and said instead that it "will assess the appropriate path of the target range" for fed funds.

Powell reaffirmed that comment several times during his press briefing. More than once, he said the Fed would keep its policy steady as long as there are no threats to its outlook for a moderately growing economy, strong labor market and inflation near its target 2% target. In fact, he added that it would take a "really significant move up" in inflation for the Fed to return to raising rates.

"I think he's doing a great job. First of all, I think he's doing 100% the right things," said Rick Rieder, BlackRock's global CIO of fixed income. "Clearly uncertainty in the world required him to drop rates ... He said it was a mid-cycle adjustment, and mid-cycle adjustments have been a 75 basis point move, and that's what they're doing. And now they're putting liquidity in the system, and that's taking pressure off the dollar."

Powell also discussed the Fed's activity in the short-term lending market. The Fed plans to operate a backstop facility until January, after a spike in rates last month, due to what seems to have been a temporary cash crunch. The short-term lending market, or repo, is where banks go to fund themselves. The Fed also is expanding its balance sheet, or adding liquidity to the markets, by temporarily purchasing Treasury bills.

Powell: Would need to see 'really significant' rise in inflation before hiking rates
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Powell: Need to see 'really significant' rise in inflation before hiking rates

"If something causes us to materially reassess our outlook that's what would cause us to change our view from the appropriate stance of policy," Powell said.

Art Cashin, director of floor operations at UBS, said it was Powell's inflation comment that triggered a rally in stocks. "He did very well. He kind of let them know he's not thinking of any rate hikes unless inflation begins to take off. He basically said we're only going to go two ways, either sideways or down," said Cashin.

The S&P 500 rose 9 points to a new high of 3,046. Treasury yields initially rose on the news but backed off again, and then fluctuated several times. The bond market had been expecting a hawkish announcement

"I think what it means is we're going to be in a stable rate range for a while. It would have to be a significant shock to the system for him to drop rates again. They're not going to raise rates for a long time, which is what I think is the right call," Rieder said. "Negative interest rates don't make sense and he's stopping short of getting close to the zero bound, which he should...I think people realize in the market that they're standing ready to act and they don't need to do more right now."

Drew Matus, chief market strategist at MetLife Investment Management, said Powell got the market reaction he was looking for. Powell, who has made some communications blunders, was able to shift Fed policy without rocking markets.

"I think they gave the market what they wanted. They got the rate cut but they also got the signal that the Fed was going to pause and the bar for further action is moving higher," said Matus. "They sound like parents talking to kids. Last time, it was 'we're going to have dessert' and this time it's 'we'll see after you eat your dinner.'"

Powell has been criticized by Trump and White House officials for not being more accomodative, even when he was cutting interest rates.

"From what I see in the economy— and I'm sure he'll get criticized— it's exactly the right set of decisions, and I give him a lot of credit for making a bold call," said Rieder. "Trade was more uncertain a few months ago. Brexit was more uncertain."

"I think the market is saying it's all good. I'm okay taking risks, and I'm okay being in the pool because i know they're going to put a blanket of support under it if they need to," Rieder said.

Rieder said in the current environment he favors bonds at the front end of the curve, like the 2-year note.

"They're not going to raise rates for a long time. If the economy softens, they're going to cut them. I love the front end ... the curve should steepen here,' said Rieder.

The 2-year yield moved to a high of 1.66% while Powell was speaking, but it backed off. The 10-year was at 1.77%, off several basis points after the Fed statement.

"I think the 10-year is in a range, but I don't think rates are going to move significantly lower at the long end of the curve..If anything they could move higher and the curve could steepen from here," Rieder said.

Market pros noted Powell was careful to stay on message. His prior gaffes include a comment last October that the Fed was a long way from neutral, when it was near the end of its rate hiking course. In May, he also spooked markets by saying he thought low inflation was transitory, at a time when investors were looking for a rate cut.

This time, Powell seems to have delivered the message he wanted to send.

"He jumps around a lot, but at the end of it all, I think he gets the market right where he wants it," said Jim Schaeffer, deputy CIO at Aegon Asset Management. "Don't expect a cut, but I'll be there if we need to."