Summary: The following critical things stand out:
- Fed cuts both the fed funds and IOER rates as expected, but does not expect any more rate cuts in 2019; the terminal rate was kept unchanged at 2.5%
- The Fed has never been more divided: 7-3 vote to cut; Esther L. George and Eric S. Rosengren voted to keep rates unchanged; Bullard voted for a 50bps rate cut (guaranteeing him the job over Kashkari when Trump fires Powell); 7 FOMC members predicted another cut this year, while 10 say hold or raise
- No mention of POMO or permanent repo ops: with consensus shifting rapidly to expect some major liquidity injections from the Fed namely POMO, watch overnight repo rates explode overnight as Powell failed to provide any repo support.
Best summary of today’s process:
IS THERE ANYTHING MORE EXHILARATING AND ENDORPHIN SECRETING THAN READING FED MINUTE REDLINES
— Wu-Tang Financial 🥑 (@Wu_Tang_Finance) September 18, 2019
As we detailed earlier, things have not gone exactly according to plan since The Fed cut rates for the first time in a decade:
But today is a big day for Jay Powell as he has to somehow explain why he is cutting rates in the face of:
Dramatically positive macro surprises
Unemployment near record lows
Stocks near record highs
Bond yields near record lows
Dollar near record highs
Of course, there is the fact that policy uncertainty has never been higher…
And The Fed just suffered the biggest short-term liquidity crisis since 2007!
The market is completely priced for at least a 25bps cut today…
But, we note that markets have become more hawkish in recent weeks – shifting from expecting 2.7 rate-cuts to just 2 rate-cuts in 2019 (including today)…
Perhaps, Powell has seen this chart?
FedEx down 12% from open…
If the FedEx signal is anything to go by, then we are headed for rather bad times ahead..
I have my chips on this as well.. pic.twitter.com/SRisUCSoLc
— AndreasStenoLarsen (@AndreasSteno) September 18, 2019
Data-Dependent, my arse.
How many dissents this time? (anticipated dissents – Esther George, Eric Rosengren and, possibly, Jim Bullard)
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To check all the dovish boxes, Powell would need to: cut 25bps, suggest more to come (dovish tweaks to language), median dots adjusted lower, fewer dissents, restart QE. As BMO noted:
In terms of assumptions for the FOMC, a 25 bp cut is essentially a done deal. The statement should maintain language that the Committee “will act as appropriate to sustain the expansion” to keep the door open to future rate cuts. The dot plot will shift lower, though we’d caution against over-interpreting this forward guidance due to the divergence between modal member forecasts and monetary policy implemented with a risk-management focus. We’re skeptical that the longer-run dot will decline further from 2.5%, which should continue to provide support for long rates (5y5y is around 2% while 10y10y is closer to 2.5%).
Anyway, here’s what he did…
7-3 vote to cut. 7 predict another cut this year. 10 say hold or raise
Bloomberg’s Key Takeaways from the Fed decision:
No surprise on main action, as FOMC cuts benchmark rate 25 basis points for a second straight meeting — to 1.75%-2% target range
The dot plot of rate forecasts is somewhat hawkish, showing a split over the need for more easing, not just in 2019 but in coming years: Seven officials see an end-2019 funds rate of 1.625%, with five at 1.875% and five at 2.125%; none see the rate going below 1.625% through 2022
Esther George and Eric Rosengren again dissent in favor of no cut, while James Bullard seeks a half-point cut; it’s the first decision with three dissents since 2016, under Janet Yellen
The Fed also lowered the interest on excess reserves rate and the overnight repurchase rate by 30 basis points, with the central bank seeking to regain control of the benchmark as money-market strains persist
The FOMC reiterates that it will “act as appropriate to sustain the expansion”; the statement contains minimal changes, mainly to note household spending gains have been “strong” while business fixed investment and exports have “weakened”; the mention of exports is new and there’s a more explicit nod to trade tensions weighing on growth
Fed officials’ economic forecasts were largely unchanged from the prior round in June; there’s a slight upgrade in GDP growth expectations, but policy makers still see the expansion slowing and nowhere near Trump’s 3% goal
And the DOT-plot adjusted…
Fed projections show no further cuts in 2019, but seven of 17 policymakers saw one more cut as appropriate
Looking at the dot plot, it’s clear there are three camps within the Fed:
Pre-emptive accommodation is not needed; we’ve already done too much
We’ve delivered the necessary amount of pre-emptive accommodation for now
More pre-emptive accommodation is needed
The Fed is now expecting 2019 fed funds rate at 1.9 where we are now…
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Full Statement below:
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Good luck in the press conference.