Treasury prices are higher across curve this morning due in part to dovish central bank decisions/guidance from Japan and Europe. Global equity markets are mostly higher, and S&P 500 futures are currently up 0.18%. Markets continue to digest yesterday’s Fed decision. As expected, the fed funds target range was lowered 25 bps, and the interest on excess reserves (IOER) rate was lowered by 30 bps. However, the divide between policy hawks and doves became more evident. There were three dissenting votes on the decision, with one voter wanting a 50 bps rate cut and two voters wanting no change at all.  The median projection for the funds rate going forward showed no change for the remainder of 2019 and 2020, but 7 of the 17 participants projected one more rate cut this year. Of course, the June forecast also showed no change in the target range for the remainder of 2019, and that clearly didn’t end up being the case (i.e., don’t pay too much attention to these projections).

The messaging from Powell’s press conference was consistent, but perhaps a little more disciplined relative to the July meeting. He is still essentially characterizing the rate cut as a mid-cycle adjustment, while still acknowledging that “a more extensive sequence of rate cuts could be appropriate” if the economy weakens. Powell repeatedly pointed to trade policy uncertainty and the global economy (specifically China and Europe) as the main risks to the Fed’s outlook.  On that note, the OECD slashed its global growth forecasts yesterday to the lowest levels in a decade, citing trade tensions as the primary driver of the forecast revision.

Not surprisingly, Powell was asked numerous times about the stress in overnight funding markets this week. He said the New York Fed’s intervention in repo markets this week “has no implications on the economy or the stance of monetary policy,” but Powell did acknowledge that the Fed will be reassessing the size of its balance sheet as it relates to the supply of reserves in the banking system. The optimal level of bank reserves is never known with certainty (and is affected by currency growth), and it can certainly impact overnight funding markets, as witnessed this week. Powell said that they will be focusing closely on this question “during this inter-period meeting and at our next meeting (October 30).” At that point, the Fed will likely announce organic growth of the balance sheet to increase supply of reserves, which some are referring to as “QE lite.”

Jason Haley
Managing Director, Investment Management Group