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When New York Fed President John Williams spoke of the need to "vaccinate the economy" on Thursday, the markets listened. And when the New York Fed itself spoke later to clarify its words, investors were again listening.
In fact, as the US central bank moves closer to what should be its first rate cut in a decade, global markets are keeping all the clues about the coming decision with an unusual degree. Investors are trying to determine whether policy makers are seriously concerned about the economic recession or whether they simply want to insure against this eventuality.
One of the reasons for the confusion of investors stands out. Fed Chairman Jerome Powell laid the groundwork for a reduction in interest rates, but failed to reach a consensus on why a reduction is needed. Policymakers over the past few weeks have outlined rate reduction rationale ranging from bond market behavior to low inflation to the need to raise wages. Some also suggested that they did not see the need for a rate cut in the first place, as did Friday Fed Fed President Eric Rosengren.
So, when Williams, Powell's No. 2 at the policy-making table, seemed to make some clarifications, the traders jumped on the issue.
US stocks and bonds, as well as Fed rate hedges, rallied Thursday in milliseconds, following comments by Williams that seemed to suggest a strong appetite for mbadive rate cuts. The S & P 500 benchmark Friday remained close to the all-time record set earlier this week.
"It's better to take preventative action than to wait for the disaster," Williams said at a university conference on Thursday. "Do not keep your powder dry."
Later in the day, a representative of the New York Fed said that Williams' comments were about "no potential political action" at the next rate setting meeting, but were academic in nature.
In his speech, Williams cited years of research. A policy maker for at least five years, he has repeatedly used similar wording to describe how the Fed should behave when interest rates are close to zero.
But investors are now listening very carefully.
Markets have long been waiting for the Fed to cut rates at its July 30-31 meeting. Some have interpreted Williams' comments not only as moving forward, but suggesting the need for a deep discount of 50 basis points.
Not even the president of the St. Louis Fed, James Bullard, the only decision-maker of the Fed who had voted at the meeting of the Fed in June for a reduction in rates, has been so far. On Friday, Bullard again stated that he was backing a quarter point cut.
According to the CME Group's Fedwatch Tool, the probability of a 50 basis point cut at the July meeting climbed to 71% on Thursday after Williams' speech, but fell to 23% on Friday.
President Donald Trump, who has repeatedly criticized the Fed for raising rates, also took the floor. "I like the first statement of New York Fed President John Williams much better than the second," Trump said on Twitter.
"Its first statement is 100% accurate, in that the Fed has" raised "much too quickly and too soon," wrote Trump, reproaching again for the Fed's rate hikes to curb economic growth.
Williams did not tell the Fed to raise rates too quickly or too soon, and his record of remarks and political votes shows he was supportive of all nine central bank rate hikes since 2015 .
Fed decision-makers, meanwhile, risk disappointing markets if their communication is not perfect. Any sale could aggravate financial conditions and increase the risk of negative consequences for the economy.
The New York Fed did not comment on the market reaction or Trump's comments. Policymakers enter Saturday in a period of traditional "black-out" before their next meeting, during which they avoid making political decisions of any kind.
"The Fed is lagging behind market prices for eight or nine months and it can dramatically correct the inversion of the curve by reducing 50 basis points," said Gary Cloud, a portfolio manager at Hennessy Equity and Income Fund. . The problem, he said, is if the Fed is perceived as "an ire at the pressures of the president or if he knows something negative about the direction of the economy that we do not know ".
Given that Williams is vice president of the Federal Open Market Committee, "it's understandable" why market expectations have shifted to a 50-basis-point discount, Mike O & # Rourke, chief market strategist at JonesTrading. said in a note that it was "alarming" that the Fed has trouble communicating with the markets.
"It does not matter when the markets reach unprecedented highs, but the rest of the time is very important," O'Rourke said.
Source: Reuters (report by David Randall, Trevor Hunnicut and Lewis Krauskopf, additional report by Ann Saphir, edited by Alden Bentley and Leslie Adler)
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