Powell June Press Conference Quotes

Powell Intends To Stay Fed Chair

Let's review some of the quotes from Jerome Powell at his press conference to fully quantify Fed policy.

First, when asked what he would do if President Trump tried to demote him, he stated, “I think the law is clear that I have a four year term and I fully intend to serve it."

That’s a tough question because obviously, if he was asked to resign, he would. However, Powell doesn’t want to give in to speculation about Trump possibly firing him for being too hawkish. He wants the Fed to stay unbiased.

Ultimately, there's little chance of Powell being replaced between now and November 2020. That’s because if Powell is replaced, it would create uncertainty. Meaning, stocks would crater.

The government and the Fed are always careful when transitioning Fed chairs.

Powell - That is why it is done openly and the market is given plenty of advanced warning.

President Trump would only have enough motivation to replace Powell if Powell acted differently than what the market wanted. Fed chairs have been trying to give the market what it wants since Greenspan in the 1990s; that won’t change.

Powell may or may not want to cut rates to support the President’s trade negotiations. However, it doesn’t matter what he wants. If the economy weakens because of Trump’s trade war, the Fed will cut rates.

There is no situation where Powell will go rogue and cause Trump to replace him. If he did go rogue, then his actions would cause stocks to crater and Trump replacing him might be applauded.

Powell - Fed Ready To Prevent A Recession

The most important point Powell made at his press conference was when he stated, “An ounce of prevention is worth a pound of cure.” Fed is about cut rates to prevent a recession rather than in reaction to one.

We won’t know by GDP growth whether there is a recession until well after the fact, but that doesn’t mean you should just ignore economic data and start claiming there is a recession every time there is a slowdown.

People mistakenly called for a recession in 2012 and 2016. If there is a recession, no amount of rate cuts will save the stock market from falling sharply. I don’t mean there will be a 50% decline, but there will be at least a 20% drop.

The chart above shows the market implied actions of various policies over the next year.

The market appears split between insurance cuts and recessionary cuts.

Powell - Dark blue part that shows recessionary cuts is consistent with 4 or more cuts. Light blue part that shows insurance cuts is consistent with up to 3 cuts.

This just an estimate because technically if the Fed cuts rates by 50 basis points in July and then cuts rates 2 more times over the next 11 months, there doesn’t need to be a recession. It’s just likely that there is a recession in that case.

Powell - Not Much Support For June Cut

When Powell was asked why there wasn’t a cut in June, he stated, "I would say that there was not much support for cutting rates now." Since 8 out of 17 Fed members projected rate cuts in 2019, it means most weren’t voting members.

If Powell had no filter, I bet he would give two reasons why the Fed didn’t cut in June. First is the Fed stated it would be patient at the May meeting. Waiting 1 more month gives the Fed more credibility.

Secondly, the Fed is waiting for the G-20 summit to end before making a decision. Fed would be in a pickle if it cut rates 50 basis points on Wednesday and then Trump and Xi agreed to meaningfully work on the trade deal at the G-20 summit.

There won’t be a deal at the G-20 summit, but progress can be made. Both sides need to get back to where they left off in early May and work on the deal in July. By early July we will know if the negotiations are getting anywhere.

Trade Is Clearly An Issue

Powell - I like to emphasize how important trade is to the Fed’s guidance because the Fed is avoiding it to not sound political. Fed sees tariffs as a risk. It needs to cut rates if the economy falters because of them.

However, it doesn’t want to be seen as supporting or opposing the President. Fed generally acts in all Presidents’ interests because all parties want to avoid recessions and keep the economy in expansions.

Specifically, Powell stated, “Overall, our policy discussion focused on the appropriate response to the uncertain environment. Many participants believe that some cut to the fed funds rate would be appropriate in the scenario they see as most likely.”

In other words, those who see new tariffs supported cutting rates twice. And those who don’t supported no cuts.

Only uncertain aspect is if all the FOMC members but one who stated they think there will be 2 cuts this year can’t vote, then does that mean there won’t be cuts? I lean towards thinking there will be cuts.

Fed knew how the market would take this decision and guidance. The Fed wants the market to be clear on policy. It would be a massive communication failure if members don’t vote for cuts on July 31st.

Powell - Conclusion

I reviewed some of Powell’s quotes because it’s not enough to just look at the statement, the economic projections, and the dot plot. We need to know what logic is behind those decisions.

Powell did a good job of explaining the Fed’s decision which is why the stock market continued to rally during the press conference and after it was over.

This was a rare situation where the market liked what Powell had to say. That’s probably because the market prefers dovishness. That doesn’t mean the Fed should always be dovish. However, it does make sense to cut rates if the trade war gets worse.

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