• The Fed announced another rate cut in October, but forward guidance suggests that monetary policy is on hold for now
  • Trade headlines have been less negative, and the U.S. economy appears to be in better shape than some feared
  • The Fed is increasing the supply of reserves to combat stress in short-term funding markets, but some contend that there’s more to do on the regulatory front

As widely expected, the Fed decided to lower the target fed funds range by 25 basis points (bps) to 1.50-1.75% on October 30, including a 25 bps reduction in the interest on excess reserves (IOER) rate. However, the official statement and Chair Powell’s messaging following the meeting suggested a pause in interest rate policy barring a significant change in the data trend (good or bad). While financial markets remain very sensitive to U.S./China trade and geopolitical events, interest rates are more likely to trade in a tighter range (less volatile) with the Fed presumably on the sidelines for the time being. Trade headlines have generally been less negative over the last month, and it appears that a “no-deal” Brexit is a lesser probability for the remainder of 2019. The presidential impeachment inquiry could potentially inject some volatility into markets, but it hasn’t been a factor to this point.

Recent economic data have surpassed expectations, particularly the October employment report and Q3 GDP. Regarding the former, job growth was better than expected in the month, and the prior two months were revised higher by a total of 95,000 jobs. Nonfarm payrolls added 128,000 jobs in October (85,000 expected). This may not seem all that impressive, but when considering the effects of the General Motors strike and temporary census workers, six-figure job growth is more encouraging. The first estimate of Q3 GDP growth suggests that the U.S. economy expanded at a 1.9% annualized pace over the quarter, 30 bps above expectations, and just 10 bps slower than the 2% Q2 growth rate despite greater uncertainty surrounding trade and slowing global growth. Once again, consumer spending paved the way (personal consumption +2.9%), more than offsetting the effects of a second consecutive quarterly decline in business capital expenditures.

Fed On Hold
The FOMC voted 8-2 to lower the fed funds target range by 25 bps, but it was characterized by some as a “hawkish cut” given the forward guidance that accompanied the policy rate reduction. In the official statement, the commitment to “act as appropriate to sustain the expansion” was replaced with an intention of the Committee to monitor incoming data as it “assesses the appropriate path of the target range.” While subtle, the former conveys an easing bias while the latter clearly communicates the Fed’s intention to pause current interest rate policy (i.e., neutral bias). During the press conference, Powell said that monetary policy is “in a good place” and is “likely to remain appropriate.”  For policy easing (or tightening) to resume, the Fed chair said such an action will require a “material reassessment of our outlook.” Pushed further by reporters to clarify what drove the more positive economic outlook relative to the September FOMC meeting, Powell said “I was referring there to trade developments.” Prior to the October 30 meeting, markets were pricing a 25-30% chance of a December rate cut, but post-meeting, the probability fell to 0%.

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