Powell explains Fed’s 50 bps cut: Key takeaways

As investors digest the Federal Reserve cutting the fed funds target rate by 50 basis points, its first cut in four years, Greg Daco, EY chief economist, and Ann Berry, Threadneedle Ventures founder, join Seana Smith and Josh Lipton on Market Domination to break down what Jerome Powell’s remarks say about the US economy and the market’s (^DJI,^GSPC, ^IXIC) reaction. Daco highlights three takeaways from the press conference: Powell is focused on recalibrating monetary policy, the Fed is not on a preset course, and Powell holds a strong influence on policymakers as most officials got on board with his view that a 50 basis point cut was appropriate. The economist notes that, in his view, a “key downside” of Powell’s remarks was “the fact that he remained very much data dependent.” He says, “I wanted to see a little bit more of a forward-looking perspective and where we’re headed and how fast we’re headed.” Berry adds she was disappointed Powell wasn’t asked if the Fed is “going to start using different data sets” since the economic data used is “backward-looking. We’re in the age of incredible data collection [and] incredible technology. What is the Fed doing…about what different kinds of data can help them be better forward-looking.” Daco says it’s “it’s very encouraging not to see much reaction in the markets, because essentially the Fed did what was largely expected over the last couple of days.” If the Fed had cut less than the market expected, “the risk would have been a repricing of rates higher” and “yields rise rapidly and that that hits mortgage rates, consumer rates, auto loan rates and that deters private sector activity.” For the average consumer, the economist says the rate cut will likely have minimal impact. “You actually have a fairly limited effect of the Fed’s easing or tightening because it’s 25 basis point increments…So that 25 basis point [or] 50 basis point doesn’t do a whole great deal in terms of stimulating or cutting economic activity” in regard to mortgages, auto loans, and consumer rates. He notes, “If you have a broad rise in rates of 50 basis points or higher in the opposite direction, that can rapidly deter economic activity,” which does impact the average consumer.
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