Rates and the Limits of Monetary Policy

Fed Chair Powell’s congressional testimony was possibly overshadowed by other matters before Congress, but significant nonetheless. He reiterated the message from the last Fed meeting: the mid-cycle adjustment (3 rate cuts in 2019) is over, and the Fed is pausing. It was like a victory lap after stock markets hit record highs this week and he commented that the “economy remains consistent – moderate economic growth, a strong labor market”. The futures market is predicting “no cut” until well into 2020. So we seem to be finally at the “neutral rate” of about 1.50% (note that many Fed participants pegged the neutral rate to be about 3.50-3.75% in recent years). And the Fed stands ready to act if “developments emerge that cause a material reassessment”, so we are back to watching the data. Powell put his audience (Congress) on the spot. He mentioned that the present rate of deficit spending is “unsustainable” and that the USA’s debt burden will make it difficult for future Congress’ to actually engage in fiscal policy (stimulus, infrastructure) during the next downturn. He was basically saying that monetary policies have reached their limit (note that he shot down any talk of negative rates in the U.S.) and that fiscal policy is lagging and hamstrung by the budget deficit. However, Congress is busy trying to pass another stopgap 30-day funding bill to avoid a government shut-down before Thanksgiving.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners