Not the time to lack 'conviction'

One of the numerous costs of President Trump’s assault on Federal Reserve Chair Powell is casting monetary policy as black and white. It might have seemed that way decades ago. Before Chair Bernanke essentially opened it to the public, the Fed was a black box. It communicated primarily through the Federal Open Market Committee (FOMC) statement and daily trading operations rather than through speeches, press conferences and Congressional testimony. But monetary policy is as gray as it gets in economics, involving as much opinion as data. 

Trump’s tirades also drown out healthy discussions about the central bank. Had he not issued a screed after the FOMC held rates steady last month, the main story might have been a growing restlessness among officials. Actually, it should be. No participant dissented from the decision, but the June Statement of Economic Projections (SEP) shifted subtly from March’s, suggesting a potential divide. While the median “dot” of the fed funds rate remained at 3.9% — implying two quarter-point cuts this year — seven voters indicated zero cuts compared to four in March.

Powell’s response to the shift was to downplay the significance of the dot plot. “No one holds these rate paths with a great deal of conviction...and you can make a case for any of the rate paths that you see in the SEP.”

One could ask why policymakers bother to produce the SEP if they do not have “conviction.” Perhaps they actually don’t, as there is speculation the Fed might alter the dot plot in its soon-to-be-released updated policy framework. In any case, it seems we won’t see a rate cut until September.

In the face of withering criticism, it would have behooved Powell to be resolute in his opinion that increased tariffs and intensified geopolitical conflicts could put upward pressure on inflation. After all, his stance has been to avoid the policy mistakes of the 1970s, when the Fed lowered rates too soon and inflation reaccelerated. On this point, he has the backing of most of the FOMC; members raised the Core PCE levels they expect to see in the near future.

One member who seems close to dissenting is Governor Christopher Waller. Citing the weakening labor market, he said he would support a rate cut at July’s meeting. But he was appointed by Trump and might be auditioning to succeed Powell. Speaking of that, the Wall Street Journal reported that Trump might take a path we knew was possible: naming the person he will appoint to succeed the Fed chair far earlier than is typical. The newspaper floated Waller, Fed Governor Kevin Warsh, National Economic Council director Kevin Hassett, Treasury Secretary Scott Bessent and former World Bank President David Malpass. That’s a lot of names, though. By the time it is sorted out, it already might be time to announce the nominee.

Whatever the exact placements of the dots, cash managers will be happy for rates to decline only slightly and gradually. At the annual Crane Data Money Fund Symposium, held in late June in Boston, optimism reigned. Many of the attendees and speakers professed confidence that industry money market fund assets will remain above $7 trillion, with some expecting they will approach $8 trillion. If rates do fall by 1 percentage point by the end of 2026, as the SEP also indicated, yields should still top 3%, likely remaining attractive to investors. 

Innovation was a focus at the event. Discussions often touched on the digital future, primarily stablecoin and blockchain. The royal court’s tech counselor has the ear of King Cash these days, and the sentiment in Boston was that digital liquidity products will grow in stature and number.