Today the Dow Jones is up a few points after Fed chairman Jerome Powell came out yesterday with some rather abstract responses involving federal rate cuts.
“Overall, our policy discussions focused on the appropriate response to the uncertain environment,” Powell said in widely televised remarks yesterday. “The projections of appropriate policy show that many participants believe that some cut in the Federal funds rate will be appropriate in the scenario that they see as most likely … though some participants wrote down policy cuts and others did not, our deliberations made clear that a number of those who wrote down a flat rate pass agree that the case for additional accommodations has strengthened since our May meeting.”
Since Powell is using some extensively lawyerly diction (for instance, using the word ‘appropriate’ no less than three times in the space of 42 words) let’s break this down in plain English:
First, a Google search for the term “policy cuts” uncovers absolutely nothing, indicating that Powell is simply referring to respondents who might opt for rate cuts as a matter of policy, and is not using industry jargon.
As for “flat rate pass,” Investopedia provides the following (click in to read):
A Fed pass is an action taken by the U.S. Federal Reserve to increase the availability of credit by moving additional reserves into the banking system. The supply of loans is increased as more funds are injected into major banks, typically allowing lenders to originate more mortgages and other loans at lower interest rates. … A Fed pass is a prime tool used by the Federal Reserve to influence the economy. It could be taken to combat economic difficulties, such as a credit crunch. But like all Fed actions, it has only an indirect affect on the economy.
When money is tight, either because interest rates are high, banks are wary of lending, or consumers and businesses are saving instead of spending and borrowing, the Fed often intervenes to jumpstart the economy. The Fed can’t force people to buy more stuff, or even force banks to loan more money.
But by injecting more cash into the banking system it hopes that banks will be encouraged to lend more, and at lower interest rates that are more appealing to consumers and businesses. To inject more money into the banking system, the Fed buys back U.S. Treasury bonds from banks and other institutional holders.
These are sometimes referred to as “open market operations” (OMO). The Fed pays for those bonds by depositing cash in the banks, which is the actual “pass.” The banks, in turn, can use that cash to generate more loans, up to the reserve requirement mandated by the Fed. If the reserve requirement is 10 percent, then the bank must hold in reserve at least $1 out of every $10 it holds, to guard against bank runs.
EPIC TLDR: The “pass” involved the Fed giving the banks more money, ostensibly to boost credit activity (though that link has not apparently been proven – do banks hoard?)
So to go back to Powell’s whole mouthful:
We talked about different things.
Lots of us thought a rate cut makes sense.
Others want to dump more money into banks from reserves BUT – since our May meeting, a Twitter-addicted POTUS has been continually battering us on demands that we do a rate cut, and investors wants us to do a rate cut – so those of us who want to do a “fed pass” are also giving in on a rate cut.
And then the words that he didn’t say:
“Does that make sense?”
Is it strong enough tea to suggest that most people involved in the polling process admitted that the case for rate cuts is strong?
According to the markets this morning, it is, but look for markets to quickly change in a world where a few stray words can cause big oscillations in stock prices.
For instance, the FAANG group (Facebook, Apple, Amazon, Netflix, Google) known as a prime mover for U.S. markets is likely to change quite a bit as new reports come out about U.S. lawmakers attempts to ramp up an antitrust probe into these technology giants.
Then there’s the trade horizon, where markets are just waiting for some word from the American and Chinese sides about whether the two superpowers are due to commence punishing tariffs that would, according to U.S. retailers and economists, push up prices, depress the global economy and generally disrupt the markets.
Amid all that, we have to really parse Powell’s legalese – because that’s what the market is doing.