This week makes interesting on-the-job training for Federal Reserve Chair Jay Powell. On cracking open the crisis-management handbook, he will read that the first rule is that a significant asset price move reveals something about someone’s balance sheet. Unfortunately, what that is and whose balance sheet is unknown before the event. The second rule is to fade the initial impulse to react because financial markets can be volatile and mostly self-correcting. As a result, Fed rhetoric typically moves much more slowly than markets. The third rule is that a policy decision reveals an official opinion about the underlying economy. The same Fed enjoying good press last year that its hikes showed confidence in underling economic strength most likely now frets failing to deliver what had long been expected will be read as doubting the viability of the expansion.
Combing these rules counsels patience and to react to any potential adverse fallout from an asset price move using supervisory authorities, not the initial price move itself using monetary policy. The global economy has momentum, cost pressures are intensifying, and monetary policy is in motion. Central bankers mostly follow Newton’s first law that a body in motion stays in motion. We have thought for some time that the Fed will move four times this year, and we still think that. In this regard, the repricing of fed funds futures over the past few days seems overdone. Shaving more than 10 percent off the probability of a move at the next FOMC meeting (to 80 percent) should be read as the 20 percent probability of a significant extension of the drop in share prices. Because that seems too high, we would also put more chips than 17 percent that the FOMC moves at least four times in 2018.