On Wednesday, the Fed cut rates for the third time this year, which was widely expected by the market.
What was not expected was the following statement.
“I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.”
– Jerome Powell 10/30/2019
The statement did not receive a lot of notoriety from the press, but this was the single most important statement from Federal Reserve Chairman Jerome Powell so far. In fact, we cannot remember a time in the last 30 years when a Fed Chairman has so clearly articulated such a strong desire for more inflation.
Why do we say that? Let’s dissect the bolded words in the quote for further clarification.
- “really significant”– Powell is not only saying that they will allow a significant move up in inflation but going one better by adding the word significant.
- “persistent”– Unlike the prior few Fed Chairman who claimed to be vigilant towards inflation, Powell is clearly telling us that he will not react to inflation that is not only well beyond a “really significant” leap from current levels, but a rate that lasts for a period of time.
- “even consider”– If inflation is not only a really significant increase from current levels and stays at such levels for a while, they will only consider raising rates to fight inflation.
We are stunned by the choice of words Powell used to describe the Fed’s view on inflation. We are even more shocked that the markets or media are not making more of it.
Maybe, they are failing to focus on the three bolded sections. In fact, what they probably think they heard was: I think we would need to see a move up in inflation before we consider raising rates to address inflation concerns. Such a statement would have been more in line with traditional “Fed-speak.”
There is an other far more insidious message in Chairman Powell’s statement which should not be dismissed.
The Fed just acknowledged they are caught in a “liquidity trap.”