While the Federal Open Market Committee (FOMC) met market expectations yesterday with a 25 basis point (bp) cut to the federal funds target range, the outlook for future easing seemed to skew less dovish than anticipated. Additional details include:
The meeting comes on the heels of some of the greatest disruption seen in the repo funding markets since the financial crisis. On September 17th, repo rates spiked 300 bps above the Fed's target range on a combination of factors:
To be clear: USBAM believes the jump in repo rates is not a symptom of financial trauma where counterparties are refusing to lend to each other, but instead is technically driven by the unusual confluence of factors listed above.
To combat the dislocation in repo markets, on the 17th the Federal Reserve Bank of New York conducted the first open market repo operations in almost a decade, offering up to $75B at a minimum bid rate of 2.10% to help bring funding rates closer to the Fed's target range. Dealers took down $53.2B of Fed repo financing on Tuesday and the full $75B on Wednesday and Thursday. The program calmed funding markets, as we saw repos trade today at 1.85% - 1.90%, right near the mid-point of the Fed's target range. We anticipate these operations will be conducted as necessary going forward.
Given the dislocations seen in the funding markets, it was surprising and disappointing to see the FOMC decline to allow the Fed's balance sheet and bank reserves to organically grow. I think policymakers missed a needed and straight-forward opportunity to ease financial conditions without spending rate cut ammunition. However, Mr. Powell's observation the FOMC will "learn a lot in next six weeks" on reserves suggests a policy change on balance sheet growth may be on deck for the October meeting.
No FOMC meeting can go by without President Trump subtly weighing in. This time around we got, "Jay Powell and the Federal Reserve Fail Again. No ‘guts,' no sense, no vision! A terrible communicator!" Reading between the lines, Mr. Trump seemed unimpressed with the FOMC's actions. For his part, Mr. Powell declined to comment on the President's remarks - but to me, he looked a little ticked off when a reporter relayed the President's tweet.
Bloomberg, U.S. IG Issuance: Market Takes a Breather With Two Deals Pricing, September 17, 2019
Federal Reserve, FOMC Statement, projection materials and press conference, September 18, 2019
Federal Reserve Bank of New York, Statement Regarding Repurchase Operation, September 17, 2019
United States Treasury, Calculated New Cash/Pay Down Amounts, www.treasurydirect.gov