You want big, exciting things to happen

because it gives you something to talk about and something

to write about.

That did not happen today.

In July, the Fed offered a 25 basis point cut.

And then they said, look, we don't

know what's going on with trade uncertainty.

We're a little worried about it.

Things look fine, but we're watching very carefully.

On Wednesday they offered another 25 basis point cut,

and then they said, eh, we're good.

There's a strange thing happening, particularly

with trade uncertainty where the Fed seems

to be actively talking to people in the business community.

They're telling it that they're delaying purchases

because they don't know what's happening

with trade negotiations.

The Fed Governor's Board has in fact

modelled this and determined in a paper

that they published in August that trade uncertainty delays

business purchases.

That could put a drag on economic growth by as much

of a full percentage point over the course of 2020.

So that's a big deal.

But then when you get to the actual projections in the dot

plot, which we got today the median dot said, we're good.

We're not going to give you another cut

before the end of 2020.

So what is going on?

Most economic data continues to be good, pretty much everything

except business investment, except this concern over trade

uncertainty.

It's been pretty strong for the entire year

that we've been seeing business investment and manufacturing

decline.

So we have further proof that perhaps this is just

a manufacturing recession, something to watch carefully,

but not something to freak out about.

There also seems to be some disagreement within the Federal

Open Market Committee.

In July, we had two dissents.

They were both hawkish dissents.

Esther George, Eric Rosengren, they're both Fed presidents,

said, they thought the Feds should stand pat.

They did that again this time, but then there

was also a dovish dissent.

Jim Bullard, president of the St. Louis Fed,

said it should have been a 50 basis point cut.

Jim Bullard has been the most prominent voice

arguing for increased concern about trade uncertainty.

So there you have it - you have this idea.

They're researching it.

There's one voice that's arguing strongly for it,

but it doesn't seem to be swaying the committee.

The committee itself is divided and waiting to see what else

happens.

It's not really a surprise that the committee is so divided.

One thing that Jay Powell said when he gave his policy

speech at Jackson Hole in August was

that we are in a new era of monetary conditions.

We're in an era of low interest rates, which

he calls the monetary policy challenge of our time.

We're in an era of low inflation.

America has the easiest time of all the other major developed

economies right now.

We seem to have pretty good growth.

We seem to have slightly higher interest rates,

but it's a problem all over.

Let me just say, on the general point of diverse perspectives,

you're right.

Sometimes and there have been many of those times

in my now almost eight years at the Fed,

many times on the direction, I was

relatively clear it's relatively easy to reach anonymity.

This is a time of difficult judgments, and as you can see,

disparate perspectives.

And as I really do think that's nothing but healthy.

And so I see a benefit in having those diverse perspectives,

really.

So it is a time of difficult judgments.

It's hard to figure out what's going on

with trade uncertainty.

It's hard to figure out the effect that that's

going to have on growth.

It's hard to figure out whether a very clear, invisible

manufacturing recession is going to turn

into a more general recession.

So there is justifiable lack of clarity on what's happening.

And it makes sense then that there

would be a lot of different voices

that the Fed trying to figure that out.

Ultimately, they came to a decision this time.

But they seemed to communicate we don't really

know what's going on yet.

We're still watching.

We'll help out if we need to.

As we know, there was a disruption in overnight funding

markets on Monday and Tuesday.

Repo rates, repurchase agreements,

short-term funding spiked to as much as seven per cent.

That's a very high number.

The Fed needs to address this, and they did.

But they did it in the most minimal way possible.

Their attitude seems to be, "First do no harm."

The broad problem is, that as the Fed ran down

the asset side of its balance sheet,

the liability side of its balance sheet ran down, too.

That's basically bank reserves.

It's composed of a couple of different things,

but bank reserves is a massive part of it.

These are things that, this is money

that the Fed keeps on reserve at the Fed in case they need it.

The Fed has said to conduct policy,

it wants to be in what it calls an ample reserve regime.

They want to have extra reserves at the bank

just in case anyone needs them.

They don't want to get down to a minimum level.

Now, they didn't know what the minimum level

was until this week.

In 2014, they had $2.9tn in reserves at the Fed.

This week, they had $1.3tn.

They basically thought, OK, when we get down

in the minimum level of reserves,

we're going to notice that we're there

because we're going to see disruptions

in the overnight funding market.

That is what we saw this week.

So the Fed has to address it.

As with the other things that they talked about today, as

with the other things that Chairman Powell talked about

today, they did the least they could possibly

do to say, look, we've got this for now,

and we're watching, right?

So they made some very small technical tweaks

in how they managed the policy rate.

They didn't promise to run up reserves again

by buying more assets.

And they didn't say that they were going to put together

a more regular, a standing repurchase facility, which

is something that they had talked about doing.

It's something they actually had to do on Monday and Tuesday.

They didn't commit to that.

They didn't even mention it this time around.

So given all that they might do, they

did the smallest thing they could do while they

watch and figure it out.

And that seems to be where the Fed is right now.

A lot of things are changing.

A lot of things are weird.

We're just going to watch for a little bit.

Give us a month.

We will come back to you in October.