The Federal Reserve cuts rate by a further 25 basis points but its 'to-be-sure graf' leaves the door open for more action
In journalism, we call it the 'to-be-sure graf.''
It's the paragraph you write after you've set out the major thesis for your story and supported it with facts and quotes. It's a warning to the reader that everything that came before may be all wet.
On 11 December, the Federal Reserve included a to-be-sure graf in its statement announcing its decision to lower the overnight federal funds rate by 25 basis points (a smaller cut because there's less critical mass left) to a 40-year low of 1.75%. The discount rate was nicked a quarter point as well to 1.25%, the lowest in more than half a century.
'Economic activity remains soft,'' the Fed said, 'with underlying inflation likely to edge lower from relatively modest levels.''
Then came the counter: 'To be sure, weakness in demand shows signs of abating but those signs are preliminary and tentative,'' the Fed said.
Until those signs become pronounced and definitive, the Fed will continue to see the risks as 'weighted toward conditions that may generate economic weakness in the foreseeable future.''
'For the Fed, signs of stability are always tentative and preliminary,'' said Jim Glassman, senior economist at JP Morgan Chase. 'They're nervous they can't be sustained.''
The markets don't seem to need ultimate clarity or absolute truth.
'The markets see the positive and are willing to fill in the blanks,'' Glassman said. 'The Fed says, prove it.'
To be sure, the Fed's to-be-sure graf left the door open for more rate cuts. At the same time, it allows policymakers to claim prescience if the economy takes off. It's an easy way to hedge their bet and cover their butt in one fell swoop.
The two-handed-economist tactic is the start of an attempt to wean the markets off rate cuts without bending them out of shape.
The last thing the Fed wants to do is upend the rally in the stock market and send market rates higher when policymakers think the economy is still skating on thin ice.
A sudden announcement ' 'we're done!'' ' from the Fed, while too up-front to be realistic, would send a chill through the markets. The bond market has done a decent job already of anticipating a turn in the interest-rate cycle without any 'guidance'' from the Fed. The last thing it needs is official confirmation.
Now, you don't have to be schooled in Fed-watching to figure out the end is near. All you need is facility with basic addition and subtraction: the Fed has only 175 basis points left in its quiver.
Unlike the Bank of Japan, which has been encouraged to increase the money supply by buying more bonds even with interest rates at zero, the Fed is printing enough money to re-float the Titanic. The broad monetary aggregates M2 and M3 grew 11% and 14% in November from a year ago, respectively. These are the fastest growth rates since 1983 (M2) and 1973 (M3).
If that doesn't make central bankers nervous, maybe they should be in another line of work.
The Fed's behaviour was intuitive for most economists.
'The Fed's record over the last 50 years speaks for itself,'' said Neal Soss, chief economist at Credit Suisse First Boston. 'When we're in recession and the unemployment rate is rising, the Fed eases. That's all she wrote.''
Lowering rates in recession goes beyond intuition, however.
'I don't know of any central bank whose governing statute is known as the full employment act,'' Soss said. 'Under the circumstances, what did we expect them to do?''
While the Fed came into existence as a result of the Federal Reserve Act of 1913, the Fed's role was further defined by the Employment Act of 1946 and the Full Employment and Balanced Growth Act of 1978, known as the Humphrey-Hawkins Act. These laws required the Fed to promote policies that produce full employment as well as stable prices.
If inflation is expected 'to edge lower from relatively modest levels,'' as the Fed said, and the US economy has been growing below its hard-to-pinpoint full-employment rate for almost six quarters, then why not continue to cut rates?
For the Fed to be sure that preliminary and tentative have become pronounced and definitive, it will be too late for the market.
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Alongside Barrett, Hopkins, Boston and Thorman on 17 October