Fed Switches from Mid-Cycle “Adjustment” to Wait-and-See, Pending “Material Reassessment” of its Economic Outlook

My Fancy-Schmancy “Fed Hawk-o-Meter”

The Fed has now moved into wait-and-see mode after cutting its policy rate for the third time in this cycle, this time to a range between 1.5% and 1.75%, while praising the “strong” labor market, which supports “strong” consumer spending, which is 70% of the economy. This is one of the key aspects that emerged from the minutes of its most recent meeting on October 29-30.

The Fed’s concern over trade tensions cannot be addressed with rate cuts anyway because rate cuts in the US are patently ineffective in inducing Chinese or German companies and consumers to buy US-made goods, and are equally ineffective in producing trade deals.

In theory, rate cuts might induce businesses to invest more – and business investment is one of the admitted weak points in the US economy at the moment – but rates faced by businesses were already low to begin with, and slightly lower rates won’t make a noticeable difference in decision making if businesses don’t see the need to invest, such as demand.

The weakness was in the industrial sector, including manufacturing, the meeting minutes pointed out. But consumer-facing businesses reported “strong demand.”

And so the FOMC meeting minutes came up with this wait-and-see statement (underscore added):

With regard to monetary policy beyond this meeting, most participants judged that the stance of policy, after a 25 basis point reduction at this meeting, would be well calibrated to support the outlook of moderate growth, a strong labor market, and inflation near the Committee’s symmetric 2 percent objective and likely would remain so as long as incoming information about the economy did not result in a material reassessment of the economic outlook.

This confirms what Fed Chair Jerome Powell had said in the post meeting press conference.

And it is showing up in my fancy-schmancy “Fed Hawk-o-Meter.” It analyzes the minutes for how the Fed sees the economy, by counting how often “strong,” “strongly,” and “stronger” appear in the minutes to describe the economy. For the October meeting, the Hawk-o-Meter rose 3 points (to 23), and importantly – ha, don’t take my Hawk-o-Meter too seriously – the three-month moving average ticked up for the first time since its down-movement started with the December meeting last year:

The words “strong,” “strongly,” and “stronger” appeared 24 times in the minutes of the October meeting. But one of them was a “false positive,” dealing with the purchases of Treasury bills and not the economy. So I removed it from the tally, leaving 23. This was up from 20 in the minutes for the September meeting.

The labor market was front and center of the Fed’s assessment of the strength of the economy, with 12 of the 23 counters of “strong” describing the labor market.

Some examples how “strong,” “stronger,” and “strongly” were used:

  • “…that the labor market remained strong”
  • “Real PCE [Personal Consumption Expenditures = consumer spending] rose solidly in the third quarter following a stronger gain in the second quarter.
  • “…and stronger demand for the other CRE [Commercial Real Estate] lending categories.
  • “The volume of agency and non-agency commercial mortgage-backed securities issuance was strong….”
  • “…participants agreed that the labor market had remained strong over the intermeeting period”
  • “…household spending had risen at a strong pace”
  • “…participants agreed that consumer spending was increasing at a strong pace”
  • “…supported by strong labor market conditions”
  • “…business contacts in consumer-facing industries reported strong demand.
  • “…business sentiment appeared to remain strong for some industries, particularly those most closely connected with consumer goods”

What Powell had called a “mid-cycle adjustment” at the meeting following the first rate cut has now apparently turned into a mid-cycle wait-and-see rather than a serial rate-cut binge.

The fear that central banks with low or negative interest rates will be helpless in face of the next economic crisis has made it into the Fed’s Financial Stability Report for the first time, and with a fairly new term. Read… Fear of “Reversal Rates” Sets in, Says the Fed

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  21 comments for “Fed Switches from Mid-Cycle “Adjustment” to Wait-and-See, Pending “Material Reassessment” of its Economic Outlook

  1. 2banana
    Nov 20, 2019 at 8:20 pm

    Anyone remember a time in America when no one really paid much attention to what the FED said and, certainly, the stock market didn’t rise and fall on the adjectives used?

    Maybe a small paragraph on page B26 on the wall street journal.

    • Lisa_Hooker
      Nov 21, 2019 at 8:30 am

      Remember when there wasn’t a B section to the WSJ? It was just the Wall Street Journal. And you could read most of it and still have time to accomplish a lot during the day. ;-)

  2. njbr
    Nov 20, 2019 at 8:37 pm

    $1.3 trillion YOY deficit increase. $70 to $80 billion of treasury net purchases each month. Giant tax cut. Interest rates below the rate of inflation.

    Best economy ever !!

    In some previous world, those would have been the markers of an economy in severe distress.

    Just wait until it gets bad–how about a negative 3 percent interest rates with another tax cut and higher deficits.

    • 2banana
      Nov 20, 2019 at 9:14 pm

      In some previous world?

      Deficit 2010 – $1.29 Trillion

      Deficit 2011 – $1.30 Trillion

      QE for eight years under “hope and change” was about $4 Trillion. You can do the math.

      I am sure your boosterism in calling that was epic. And how it showed such severe distress in the economy. And remember, GDP was smaller then too.

      Because you really care about deficits.

      Oh wait…

      • Nov 22, 2019 at 12:25 am

        I tend to think the defecits and debt are irrelevant.

        If the top 10% own 70% of the wealth in this country, who is all that debt owed to anyway?

        As long as the government can make a decent life for ordinary people who have to work for a living, who cares about deficits? Private sector money is designed to funnel to the top in an oligopolistic system. If the government spending wasn’t there to throw more crumbs to the labor pool, unemployment would skyrocket.

      • Shizz
        Nov 22, 2019 at 8:19 am

        @2banana

        It’s like that scene it Tommy boy where Chris Farley damages the door beyond repair but manages to get it shut. Then when David Spade tries to open it it falls on the ground And Chris Farley exclaims “What did you do!”

        While there is plenty of blame to be placed on the previous president for doing squat to told the people who caused the economic calamity accountable I’m not sure that pointing to the deficit numbers when we were trying to crawl out of the worst economic disaster in the last half century is making a honest case. If anything I see your comment as bolstering njbr’s case.

  3. NARmageddon
    Nov 20, 2019 at 8:45 pm

    How is it that “consumer spending is 70% of the economy”? What is the remaining 30%? And is a 70/30 split a good thing?

    • Nov 20, 2019 at 10:25 pm

      The remaining 30% roughly: Capital Investment spending + government spending + net exports (exports-imports) which is a negative number in the US due the our huge trade deficit.

  4. A
    Nov 20, 2019 at 9:08 pm

    Spoiler alert: There’s not a snowball’s chance in hell the communist Chinese kowtow to Trump. They’ll never give him the satisfaction of a deal even if it kills 10 million Chinese in another “great leap forward.”. That’s just who the communists are.

    Once the market comes to grips with that, the recession will be on. Every leading indicator from manufacturing to freight to business investment is going down.

    Just like every Republican, Trump will cause an economic downturn. The economy is only consistently good when Democrats have the white house.

    • Lisa_Hooker
      Nov 21, 2019 at 8:43 am

      Yup. And if we can find another pile of sequestered cash like Social Security to borrow from we can balance the budget like the Democrats did.

      • Dink Singer
        Nov 21, 2019 at 11:18 am

        Way off topic, but Social Security never had “sequestered cash”. Since Social Security taxes were first introduced in 1937 the Social Security Trust Funds have held special Treasury securities. This is a very good thing because it means that Social Security is funded by the interest earned in addition to the taxes collected. Would you save for retirement on your own by putting the savings in a locked box or by investing them?

        When the Democrats under Clinton went way beyond balancing the budget (a very stupid thing to do) in FY 2001 they achieved a on-budget (not including Social Security and the Postal Service) surplus of $86.422 billion. The off-budget (Social Security and the Postal Service) surplus was $149.819 billion. A big problem with the Clinton plan was that by 2006 the Treasury would start accumulating surpluses because they would exceed the maturing debt. There would still be outstanding debt because it could not be paid off prior to maturity but the government was going to have to start investing the accumulated surpluses in private securities. Bush 43 solved the problem with massive tax cuts, two wars and two recessions.

        • Deanna Johnston Clark
          Nov 21, 2019 at 4:25 pm

          Social Security was one of the biggest successes that good for nothing town ever passed.
          It has to stay solvent because so many spend their savings on children and grandchildren…their education, utilities, car payments so they can participate in society.
          That was one of Obama’s few truly astute and compassionate remarks…thank you Obama. Wish you had been free to say more like that.
          The old age part of SS is separately managed and quite solvent.
          When the market tanks, those wealthy pensioners will have housefuls of company…the younger family whose Discover cards they’ve been paying off all these years. Those will pamper their old folks like the Bible says to do, so they can all eat.

  5. Cyclops
    Nov 20, 2019 at 9:27 pm

    FED making a jolly Christmas sprits with rosy glasses. Yes, the seasonal Xmas part time work to be hired will save the FED!

    Farmers have cancelled the big A/C tractors sitting at the farm dealer lots, unsold!

    Car dealers jammed full of vehicles from factory mandated orders!

    Malls being torn down or hanging by an anchor store!

    Part timers doubled down with third part time jobs!

    When will the FED stop conning the mass of financial illiterates!

    • DawnsEarlyLight
      Nov 20, 2019 at 10:22 pm

      When ‘we’ stop charging, and pay not pay with credit. The whole system will come crumbling down.

      • Deanna Johnston Clark
        Nov 21, 2019 at 4:26 pm

        I dunno…think of the savings on debt cost. It goes down a little every month you pay!

  6. tom
    Nov 21, 2019 at 10:08 am

    I agree with Hawk -0- Meter.

    Has been a strong year overall.
    A little bit of a lull in august & sept.
    and a very strong oct. & nov. for new construction
    builds. We are slammed with new builds.

  7. Endeavor
    Nov 21, 2019 at 10:11 am

    All the while road, wastewater plants, power lines and a variety of other structural needs go begging for funding. We need a few construction oligarchs to enrich and fewer money grabbers to get with the program.

  8. RD Blakeslee
    Nov 21, 2019 at 10:21 am

    Well, I remember the great depression of the 1930s and the anguish of those times.

    Money per se was not the heart of it – the whole world seemed upside down. The bolsheviks were coming to power in Russia and Hitler in Germany. Life itself was tenuous. The Executive Branch (Roosevelt) struggled to set it upright again.

    I believe the zenith of our culture occurred in the third quarter of the twentieth century. Europe liberated and grateful. The Marshall plan, Japan’s occupation and reconstruction as a republic and our temporary domination of manufacturing, due to its destruction during WWII, elsewhere in the world.

    The most important factor, then and now, was and is the spirit of the citizenry. Then, relative cultural unity – now, cultural “diversity”.

    Our nation is coming apart and what happens to fiat money and bankers will be the least of it.

    • Deanna Johnston Clark
      Nov 21, 2019 at 4:30 pm

      We have to put all those arguments on the back burner and help each other.
      When people really need money to eat, it’s amazing how those pedantic TOUGH PEOPLE SOFTEN UP.

  9. Nat
    Nov 21, 2019 at 10:44 am

    I appreciate your Fed-Hawk-O’-meter, but I do wonder how valuable this type of word analysis is v.s. Fed action. They were in a pretty Hawkish zone on your chart when they made the last few “mid cycle adjustments” downward I we base things on earlier results this year, then even with their slight uptick now we are still in a range where they could cut again, which is to say take action that is dovish despite a high hawkish reading.

    Perhaps the first derivative would have a better correlation? I.e. some sort of slightly trailing average rate of change in hawkish v.s. dovish language since the prior FOMC minutes as a better indicator of hawkish v.s. dovish action then any absolute count of words? Just by extremely rough and quick eyeballing it looks like some sort of rate-of-change approach would correlate better with actual rate policy.

    Then there is the other possibility, which is with language as a tool in its own right, the language may not correlate with action. If they need to adjust long term expectations one way while making immediate short term adjustments to rates in the other they could very well say one thing and then do another to try and adjust both of these things accordingly.

  10. Nov 21, 2019 at 11:10 am

    The Fed has gotten themselves into the 98 trap, cutting rates while the market was at new highs due to global concerns; LTCM, Asia crisis. AG later regretted that decision. The president was impeached. After the bond massacre in 94 the yield curve had failed to reinvert. Indexes made new highs in late 98 and later in 99 when anxiety about Y2K, (climate change?) subsided. Perhaps this is a market meltup, and a crash?

Comments are closed.