January 2019 – Monthly Commentary

January 2019

The January Federal Open Market Committee (FOMC) meeting yielded no rate hike and a dovish outlook for interest rates, as expected.  Chairman Powell concluded this meeting with a press conference as will be the convention following every FOMC meeting going forward.  The standard to date had been to have a press conference every other meeting.  Our guess is that he would have preferred to skip this one given his marked about-face on interest rates.  Typically, the Chairman is lobbed “softball” questions in a tacit understanding that the media doesn’t want to embarrass him.  Such was especially the case with the thin-skinned previous Chairs Bernanke and Yellen.  However, in a break from that understanding, Chairman Powell was bluntly asked pointed questions such as, “is the Fed at the end of rate hike cycle, what would it take for interest rates to rise, has the risk of recession increased, and is trade policy influencing the FOMC decision making.”  Those are all questions the Chairman would prefer not to answer since they directly affect the capital markets and pose the risk of him being wrong again.  He is now clearly perceived as having been wrong back in September when he said the Fed Funds rate was nowhere near the neutral rate.  What’s worse, one questioner asked if there was now a Powell equity put in place.  The insinuation, of course, is that’s now the conventional wisdom.  The idea of a FOMC put originally came into play when Alan Greenspan cut rates sharply in the wake of the 1987 stock market crash.  With each subsequent large market correction, the Fed would ease monetary policy conditions.  The more severe the correction, the more severe the easing of monetary policy.  Until it reached the absurdity that we’ve witnessed in the wake of the 2008 financial panic with 0% interest rates and the Fed buying more than $4 Trillion in government debt. 

Chairman Powell’s hawkish tone and December rate hike panicked investors and resulted in the sharp fall in stock prices.  He reacted by reversing his hawkish rhetoric and assessment of interest rates.  We think there’s a very good chance that reversal will come back to haunt him later this year.  The economy continues to demonstrate robust strength.  The January employment report showed that 304,000 new jobs were created in the month; a shocking amount of job creation given this stage of the cycle.  In addition, average hourly earnings rose 3.2% over last year’s reading, down 0.1% from last month but the highest rate of change since 2009.  It wasn’t that long ago that economists were bemoaning that wage grow couldn’t break above 2%.  To be fair, consumer confidence and softer measures of economic activity such as manufacturer surveys are portraying a slowing in economic activity, but we argue that it’s self-inflicted damage from the White House and Congress.  Despite the stories about government workers who were unable to pay the mortgage, put food on the table and purchase necessities for the family, the shutdown effected a very small subset of the population.  However, it had the collateral effect of depressing the general confidence of the country as a whole.  Whether in agreement with the strategy or against, it’s hard to argue that it didn’t have a negative impact on consumer sentiment.

Similarly, the trade battle with China has gone back and forth from being close to resolution to seeming likely to drag on for a very long time.  The effect on the U.S. economy so far has been muted, at best, but a number of companies that operate on a global scale have reported that tariffs are impacting their business.  If the two countries are able to arrive on a solution in the near-term, either real or perceived, that would bode very well for market sentiment and consumer confidence.  If unable to reach a compromise, the earnings of global companies will come under pressure.  The worry is that the contraction in those companies could have a contagion effect to domestic business and the consumer as a whole.  In that instance, economic growth would be at risk. 

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