While Fed Chairman Jerome Powell did appear to make his intentions pretty clear last week, the street somehow interpreted this to mean a rate cut will be coming very soon.
For those who witnessed the statements by the Federal Reserve last week after the latest session of the meeting of their Open Market Committee, the committee that sets Fed policy including interest rate changes, the message should have been read much clearer by the market than it was.
Expectations were that the Fed would decline an interest rate cut this time, which they did by a vote of 9-1 against. We also expected the market to sell off on this news at least for a time, but we didn’t see that at all, and instead we saw a rally.
Going back to Chairman Powell’s comments leading up to this meeting, he told us that the Fed is ready and willing to step in if and when the situation warrants it. This caused quite a rally, a bigger one than we would have expected, especially since this is what they do and anything other than this would be a surprise.
To be fair, having the reassuring hand of the Fed pat us on their shoulder and tell us that they are looking out for us may count for something, but it was pretty surprising that this was enough to take us out of the dip we saw in May, where markets lost 6% of their value during the month, and send us all the way back up as if none of this ever happened.
After the result of last week’s meeting were released, we seemed to have the same perception and we ended up powering through the last bit of downward price adjustment that concerns about the economy had produced in May. It was as if we were told that a rate cut is coming, but that’s not at all what they said, although we would have to be actually paying attention to the remarks and not coloring them our own hopes as if they were an influencing factor.
When the Fed tells us that they will act if warranted, this means when they decide it is warranted, not us. If our view of the economy is more negative than theirs, they aren’t just going to give in here to us, and if we assume this, we’re setting ourselves up for disappointment.
The stock market is not what some people think, and some even think that stock prices are completely determined by things like microeconomic and macroeconomic factors, but there is an intervening force that takes whatever data we have and interprets it, called the human mind. Our minds are capable of some pretty good analysis at times, but when we have a stake in something, we can easily let our emotions color our judgement.
Emotions can be wonderful things, especially positive ones, but we of course need to temper them with reality. Otherwise, we will simply be unprepared for it.
Our interpretation of recent remarks by Powell and Co. is a good example of this going wrong, but these things show themselves in the markets every day, and much of the action that occurs is driven by whim more than anything.
We can trade on whims without any problem, as we can predict such whimsical behavior well enough to be able to predict it and be right more than we are wrong, but we want to do so from a distance and not just engorge ourselves in it and join its victims.
Hope Does Spring Eternal Sometimes
Right now, there is a lot of fear and hope out there. On the fear side, we have fears that our bull run may be coming to an end by becoming too tired, fears that the economy is on a slippery slope downward, fears of tariffs and their impact and this going on for quite a while, fears about declining future earnings, a potential recession, and so on.
On the hope front, we’re left to pin our hopes on the Fed helping out the economy with a rate cut, and these hopes are so significant that we even get excited about negative economic news now, because this increases our hope that we will be rescued by the Fed.
It is said that the market has already priced in a rate cut in July from its distorted interpretations of the Fed’s true intentions, but while we may think that we’re really headed for a fall if this does not happen, who really knows if the fall will happen given the reaction to this most recent no vote to a rate cut.
The Fed might tell us no again but remind us that they will act when necessary, and we might still cling to the idea that this means one will be coming soon, and this might even reinforce our beliefs of this, much like we see hope in a declining stock because it has to stop sometime and has gone down so much already.
However, the truth might be sinking in already. After the Fed simply reiterated their views on Monday, stock markets did not get excited this time and sold off. Last week, we heard that we will see a rate cut when needed, and we took this to mean one is coming. Powell did tell us that they are still thinking about this but we haven’t gotten this far yet. That we already knew, but this did serve to dampen some of the false enthusiasm that was created by all of this.
The media in general did its best to fuel this fire of confusion when they told us that we’re getting a rate cut or cuts this year, even though the Fed told us that the current plan is for no cuts but that is subject to revision. Some were even thinking we might get a half point cut next month, which was put to rest by the sole dissenter in last week’s vote, James Bullard.
Bullard still thinks that we should do a quarter point right now, but told us that he thinks that a half a point would be too much. That should tell us in no uncertain terms that this idea is truly half-baked, although we also want to step back and decide whether the quarter point right now is baked well enough or not.
When we see a vote such as 9-1 against, we’re going to need some real change to turn this around. Just marking time isn’t that sort of change, and isn’t a change at all in fact.
There is Not Enough Reason Yet for a Rate Cut According to the Fed, and They Decide
We can’t say much at all really about the prospects of even a single rate cut in 2019, and although we might see one, things need to deteriorate sufficiently enough to get there, in the Fed’s eyes that is, not ours.
We may indeed see such a deterioration, but we need to keep in mind that this does not mean just any decline, it means one that exceeds the Fed’s projections. We may point our fingers all we want and this or that data, but this does no good when the data has thus far been unpersuasive.
On Monday, Donald Trump also weighed in again, as he repeated his desire to have Powell demoted or removed. We would think that he would have advisors who could explain to him how hopeless and ridiculous this idea is. Perhaps they have, but Trump being Trump, such things aren’t likely to stop him from beating his drum. This is more likely just a side-show, with him knowing full well that he doesn’t have the power for such a thing but he can still look to use his tweets to try to influence.
Nothing but more disappointing economic data will change the Fed’s mind, not popular opinion, the preference of the President, or all the hoping we can collectively do. We at least seem to be closer to understanding this, but given that it’s still said that these hopes have driven up stock prices quite a bit, there may be a reversal coming that is also quite a bit.
If reality sinks in more and more, we may easily slide down to closer to where we were to start the month. We perhaps won’t go all the way down because there will still be a lot of investors still hoping and misinterpreting.
It’s almost as if the stock market has been handing out rose-tinted glasses like movie theaters hand out 3D glasses. The Fed says no rate cuts this year unless needed. With our glasses on, we say, thanks, a rate cut is coming this year, and then really get drunk on this idea and start seeing double. The light is shining through these glasses a little more now.