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Comment: Even with latest developments, Fed policymakers likely to remain cautious

At 14:00 ET this afternoon (Wednesday, June 19), the FOMC will release it post-meeting statement and Summary of Economic Projections (SEP) materials. I continue to anticipate that the Committee consensus will maintain “patient” stance toward monetary policy, but the risks for a more dovish outlook for interest rates are definitely greater than when I first made that call last week. I see an increased probability that St. Louis Fed President James Bullard will dissent in the vote.

I am also maintaining my call that the SEP will signal only a marginally more downbeat assessment of the economy and drop the implied 1 rate hike for 2019 down to none.


Preview: June 18-19 FOMC meeting will not move the SEP consensus past patient and into action.

Whether my expectations are accurate or the broader anticipation that the end of the meeting is going to result in a steeper downgrade for economic activity and a rate cut on the horizon, Chair Jerome Powell’s press briefing at 14:30 ET is no longer going to be all about the risks facing the economy and how the Federal Reserve will respond. President Trump’s antipathy for Chair Powell as standard bearer for the Fed has once again become more vocal. If Trump is disappointed in the outcome of the FOMC meeting, it would not be surprising if he again strongly hinted that he wants Powell out in favor of someone more compliant to the President’s wishes. The realities haven’t changed much since the last go-around a few months ago:

  • A Fed Governor can only be removed for “cause”. Powell has done nothing illegal or unethical that would constitute such.
  • Even if Powell could be fired as Chair, he is still a Governor and as such would not have to leave the Board.
  • Even if Powell was removed as Chair and left the Board, it would still require confirmation of a new Chair. That would mean either nominating a new Governor who could actually clear the confirmation process – a thing which has failed spectacularly in the two names recently floated – or elevating an existing Governor – the sitting Governors appointed by the President so far all appear to be much more of a mind similar to Powell.
  • Forcing out Powell would again reduce the size of the Board to four sitting Governors.  This would reduce the influence of the Board in the FOMC vote. There are 12 possible votes of which 7 belong to governors. However, if there were only 4 Governors voting, that would give the District Banks 5 votes. None of the District Bank Presidents are beholden to the President for their seats on the policymaking committee. If it came down to it, the District Bank Presidents could outvote the Governors.
  • Fed policymakers will fiercely defend the independence of the central bank in achieving the dual mandate. If they decide on a rate cut, it will be because they deem it warranted by the economic data and events, not to appease Trump.

Comment: The Fed Chair does not set monetary policy. That is done by the FOMC.

I also note that the G20 leaders’ summit on June 28-29 is critical to the monetary policy outlook. A sense of how the risks to domestic and global growth have eased or heightened might tip the necessity for an insurance rate cut one way or another. The FOMC is not going to want to strongly signal policy and then have to adjust it in the short-term. Patience will serve them best at the moment, especially since there are only a few weeks until Powell will soon get another opportunity to convey the Fed’s bias on rates. July is the time for the semiannual monetary policy testimony before Congress and could be a better timed platform to signal the central bank’s intentions.

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