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    Instant Insights: three faces of the FOMC

    Instant Insights: three faces of the FOMC

    September 30, 2019 Global macro, Instant insights

    Just as business leaders and investors are grappling with uncertainty, yesterday's Fed meeting indicated central bankers seem hardly better off.

    FOMC splinters into three camps

    The FOMC’s decision-makers’ views continued to diverge. The ‘dot plot’ (which charts their rate projections) showed:

    • Five wanted to keep rates unchanged and steady into year-end
    • Five supported yesterday's cut, but would stay steady into year-end
    • Seven approved of yesterday's cut and also want another in December

    The first camp seems comforted by a solid domestic economy – thanks in particular to the US consumer.

    The third camp – the seven doves – clearly prefers ‘insurance cuts’ to protect against downside risks.

    It could all, therefore, depend on how the views of the second camp evolve over the next three months.

    A December 'insurance cut' looks likely

    For us, the second camp will likely drift towards supporting another cut in December amid slow global growth and benign inflation.

    The closely-followed ‘median’ dot plot projection was for no change in policy, but the mode indicates another cut will follow later this year (and that rates will hold steady into 2020).

    Furthermore, Chairman Jay Powell appears to be one of those in favor of another cut. He cited trade concerns and overseas risks as “actually more heightened now." Also, the term “mid-cycle adjustment,” which roiled the market in July, was notably absent from the discourse this time around. He noted, “History teaches us that it’s better to be proactive in adjusting policy.”

    Repo markets could result in a 'mini-QE' announcement next month

    The Fed was already in the headlines ahead of the meeting.

    The repo market flared up thanks to a perfect storm of factors (including US corporate taxes coming due and declining excess reserves in the banking sector) that briefly forced overnight repo rates close to 10% on Tuesday (Figure 1).

    Figure 1: Spiking repo rates could lead to 'mini-QE'

    Spiking repo rates could lead to 'mini-QE'

    Source: Bloomberg as of September 17, 2019.

    The Fed responded by injecting $75bn into the overnight repo market. To avoid having to keep conducting such operations, Powell said the Fed would ensure a “sufficient supply of reserves” via "organic growth" of the Fed balance sheet. We expect this could be announced at the October meeting, and could be seen by some as a form of mini-QE, furthering market perceptions of a dovish tilt at the Fed.

    This appears to be something of an admission that the Fed went too far, too fast, in its efforts to reduce its balance sheet and may need to reverse course to increase the volume of excess bank reserves in the system.

    Initial market disappointment reverses

    The reveal of the dots initially disappointed the market, with the Dow dropping 200 points and rates selling-off by 6bp. However, things improved during the press conference with the Dow finishing in positive territory and Treasury yields falling 2bp from their highs. Looking ahead, it’s the near-term uncertainty that’s key. Policy is clearly not following any pre-set course, but the Fed is preparing itself to assist the US economy, if needed. Please don't hesitate to contact me if you have any questions or comments. For more of our thought leadership, please visit our thinking.



    Please note: any forecasts or opinions expressed herein are Insight Investment's own as of the date of this communication and may change.

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