On the July FOMC

A 25 bp cut, but some component of the market was expecting 50 bp, and that larger cut was objectively the right move. Market reaction was indifferent at first, because the statement rhetoric was appropriately dovish, supporting future cut expectations. And an earlier-than-expected end to balance sheet drawdown will stabilize the Fed’s holdings at a level $70 billion higher than previously thought. But Powell fumbled in the press conference by calling the cut “a mid-cycle adjustment,” which implies one-and-done. We expect this error will be reversed in the coming week. 25 bp doesn’t un-invert the funds/10-year curve. 50 would have been better insurance against a slippery slope leading back to the zero-bound. With FOMC participants already admitting to heightened uncertainties, low inflation and the abandonment of Phillips Curve worries, that insurance would have been free.