UPDATE: Read the article below with narrowed eyes: after publication, a spokesperson from the NY Fed told two reporters–one being the WSJ’s primary Fed watcher, Mr. Timiaros–that Fed President John Williams was merely giving an “academic commentary” based on his wealth of knowledge regarding monetary policy, and overeager interpreters–including yours truly–took it as a sign of a 50 bp cut. Proceed with care.
When Doves Cry, Markets Move
Very dovish comments from Federal Reserve President John C. Williams rocked markets this afternoon. While prior consensus had been that the Fed would cut interest rates by 25 basis points, the likelihood of a 50 basis point cut–largely seen by the Street as all but dead–is back to even money.
Williams’ prepared comments from the New York Fed are here, titled “Living Life Near the ZLB,” or zero lower bound. Within, he employs Fed Chairman Jerome Powell’s “ounce-of-prevention” language, likening monetary policy near the ZLB to vaccinating your children. “It’s better to take preventative measures than to wait for disaster to unfold,” Williams states. The comment that the market is most focused on comes in the third section of his speech under the heading of Monetary Policy Near the ZLB (emphasis added): “don’t keep your powder dry—that is, move more quickly to add monetary stimulus than you otherwise might.”
He concludes with some key lessons, the first of which is to “take swift action when faced with adverse economic conditions.”
Market Moves As A Result
- The CME FedWatch Market Tool moved drastically from a 33% chance of a 50 bp cut to 50.7%, but began to retrace shortly thereafter
- Eurodollar futures shot up to almost 98, the equivalent of pricing in a 41 bp cut
- US Dollar Index (DXY) plunged below 96
- The S&P 500 shot up from 2,986 to high of 2,998, closing at 2,995
Clarida Comments Reinforce Message
Federal Reserve Vice Chairman Richard Clarida comments later today confirmed the very dovish stance espoused by Williams. The Fed “shouldn’t have to wait” for bad news to keep the economy on “an even keel,” he said on Fox Business Network.