The Federal Open Market Committee (FOMC) cut the federal funds target range 25 basis points (bps) at the October 30th meeting. The ease itself was not surprising (pre-meeting, futures placed a 97.1% probability on a rate cut), although street speculation whether a cut was warranted was higher than for previous meetings. I view this as a good sign. While I have been pushing for the Fed to stand tall and hold its ammo, I was rooting for this cut as a necessary step in getting on a faster track toward markets asking whether the Fed has overreacted and eased too much. Such an environment would likely promote a steeper yield curve over time and allow banks to lend more profitably, creating a virtuous cycle of increasing capital bases and loan books - which I view as a more efficient form of stimulus than lower rates.
Key details from the Fed's October 30th meeting:
The base case now has to be for a pause at the December 11th meeting. What would constitute a material change? A No-Deal Brexit? Maybe, but the risk is lower and basing policy on politics is a fool's errand. A further slowdown in business investment? Probably not - the Gross Private Investment component of GDP has already slipped into recession with growth rates of -1.5% and -6.3% the past two quarters and the Fed still signaled a pause. A convincing slump in employment conditions? That would qualify but is highly unlikely to happen in the next seven weeks. Stock market volatility? Meltdown = yes, minor correction = no. The Fed has signaled a pause and can't afford to look too beholden to equity markets. Further trade tensions? Nope, I sincerely doubt the Fed has a trade deal baked into the its forecast.
Where are we with Balance Sheet and Repo Management?
I understand the balance sheet details are a bit wonky. But let's face it, if you're reading this piece you probably dig monetary policy minutia. I do, especially when it makes my life easier. The Fed clearly does not want a repeat of the mid-September spike in repo / SOFR levels and is flooding the market with ample liquidity. While there may be small rate spikes around sensitive dates (month end, year end, refunding dates), more 300 bps jolts are unlikely.
Federal Reserve, FOMC Statement, Press Conference and Implementation Note, October 30, 2019
Federal Reserve Bank of New York, Statement Regarding Treasury Bill Purchases and Repurchase Operations, October 11, 2019
Federal Reserve Bank of New York, Statement Regarding Repurchase Operations, October 23, 2019
Federal Reserve Bank of New York, FAQs: Treasury Reinvestments - Rollovers, July 31, 2019
Federal Reserve Bank of New York, FAQs: Treasury Reserve Management and Reinvestment Purchases, October 16, 2019