The Powell Put is now obvious

Fed decided to keep the interest rate unchanged (as expected) and told the market exactly what It wanted to hear.

According to Powell, the Fed are “data dependent” (as always) and are focusing on maximizing employment and stabilizing prices. No surprise as that’s the Fed’s objective.

However, there are clear indications that Fed is now getting ready to save the market if needed. Naturally, that means interest rates back down to zero percent and more quantitative easing. For instance, Powell answered this to a question regarding increasing the size of the balance sheet: “there would be room to do substantially more.” The big question is whether they will be able to do it? I’m skeptical.

Moreover, Powell said the interest rate is now within what the Fed consider to be “neutral.” To me, that’s a clear sign that we won’t see a hike for a long time. In fact, it wouldn’t surprise me if the next time Fed decide to change the interest rate it will be down.

I also find it strange that the Fed decided to keep the interest rate unchanged and at the same time telling the market that the economy is doing fine. Especially considering how they communicated to the market just a few months ago.

Talking about changing communication, 2.5 per cent is now within what Fed consider to be a “neutral interest rate.” Even though Powell stated that it is on the lower side, it’s still another sign that the rate won’t get up anytime soon. I can’t help myself but to ask, is there really such a thing called neutral interest rate?

In short, it seems like the Powell put is now in place. Time will tell if zero interest rate and more QE will work this time. I’m skeptical.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s