Coming: More Fed Pivots, More Volatility

Fed Officials Don't Dissent, They Flip-Flop!

Prior to the Federal Open Market Committee meeting on September 17 - 18, SriKonomics had suggested that there be no reduction in the Federal Funds rate. The reasoning was that the economy was showing signs of strength reflected in impressive growth in gross domestic product and continued low unemployment rates. Also, inflation remains above the Fed’s 2% target. Instead, the FOMC, led by Chairman Jerome Powell, brought out the big bazooka and cut rates by 50 basis points rather than by the more normal 25 basis points. Only one voter, Governor Michelle Bowman, dissented from the majority decision.

Near-unanimity of view within the Federal Reserve on the need for a large rate cut? Hardly. After giving the Chairman the consensus in decision-making he appears to crave for, the lemmings — sorry, Fed officials — have started to go their separate ways.

The flip-flops have been fast and furious. After stating a few days after the FOMC decision that he would support another 50bp cut if economic growth slowed, Atlanta Fed President Raphael Bostic took the opposite position soon thereafter that he would not mind a pause at the next meeting! Think about that. Going with the Chairman on a jumbo rate cut, then suggesting another similar cut to follow, and then reversing himself with the possibility of a total pause on November 7.

Fed Governor Christopher Waller was another voter who appears to have changed his view from thinking that the economy was weak to now believing that it is much stronger. He said in a speech at Stanford University on Monday that data revisions now lead him to believe that the economy is more vibrant than he had believed, and that the central bank should proceed with “more caution” in implementing further rate cuts. To some of us — e.g., SriKonomics on September 14 — it was clear that the economy already showed signs of vigor. Governor Waller, however, used the excuse of data revisions to justify his pivot!

Data this week provided further support for believing that the Fed erred with its jumbo rate reduction. Among the most significant, we learned that retail sales surged by 0.4% in September compared with a rise of 0.1% in August, and beating consensus expectations of a 0.3% increase. This would suggest that consumer spending, which accounts for some two-thirds of gross domestic product, remains vibrant. Retail sales have posted a series of above-consensus healthy growth rates, and Waller would have had a better idea of the economy’s strength before voting if he had studied the data carefully.

While Chairman Powell indicated at his press conference on September 18 that a softening labor market was a key factor in the Fed’s decision to implement a large reduction in the Federal Funds rate, initial jobless claims fell by 19,000 in the latest week, the largest reduction in months — no support for the supposedly data-dependent Powell. Jobless claims are an early indication of layoffs, and provide no reason why the Fed should have panicked. And just yesterday, the Federal Reserve Bank of Atlanta’s GDPNow measure, the bank’s calculation of GDP growth in the current quarter, came out at 3.4%, higher than prior estimates.

Fed easing amidst the positive economic news, and the rally in financial markets that the policy easing has caused in recent weeks, will put even more funds into consumer wallets, increasing inflationary pressures. And of course, tensions in the Middle East continue to hold the risk of sharply higher energy prices and, with them, an elevated global inflation rate.

I have been expecting a Powell Pivot for sometime, and flip-flops by his senior colleagues may be an early indication of the Chairman’s action to come. The risk to investors is that a pickup in inflation could force the Fed to stop cutting rates, or even increase them. That would make markets more volatile and give rise to losses on risk assets.

Not good news for those who had gone along with Powell’s Forward Guidance.

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

October 19, 2024

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