FOMC Minutes Preview: When Will The Fed Cut Rates Again

The September FOMC Meeting Minutes will be released in just under half an hour, at 2pm ET: focus will be on clues into conditions for further rate cuts as well as any talk around a permanent standing repo facility, although it now appears that the Fed has picked the option to do POMO starting some time in November. As RanSquawk reminds us, the minutes come ahead of key trade talks between the US and China which are likely to set sentiment.

Here is a full recap of what to expect today from the Fed, courtesy of RanSquawk:

SEPTEMBER MEETING RECAP:

At its September meeting, the Fed lowered rates by 25bps to 1.75-2.00%, in line with expectations. The Committee also  saw no further rate cuts this year (according to the median ‘dot’), though reiterated its pledge to “act as appropriate to sustain the expansion”. The FOMC continued to justify the cut as insurance against downside risks presented to inflation, which remains low, as well as from global growth and trade policy uncertainty. However, the statement was still upbeat about the state of the US economy overall, particularly the solid job gains and strong household spending, though emphasized that business investment was weaker due to slower growth abroad – which Powell noted had weakened further too – in addition to trade tensions. Esther George and Eric Rosengren again dissented to the cut – both had expressed skepticism about the need for lower rates in subsequent remarks; however, James Bullard voted for a deeper 50bps cut. The FOMC also decided to lower the IOER within the target range to a 20bps spread from the top end (prev. 15bps), in a measure against the EFFR’s persistent drift higher, and threatening a break out of the target range; the adjustment came amid the repo market liquidity squeeze, putting strain on money markets, although the Fed’s statement made no mention of a standing repo facility, a tool that many expect it to announce in the months/quarters ahead. Powell said money market pressures had no impact on monetary policy or the economic outlook, and that temporary market operations would address the squeeze. The Fed Chair also pledged that a sufficient supply of reserves would be provided so that frequent use of such operations isn’t necessary. Elsewhere in the presser, Powell highlighted “uncertainties” several times and that it is certainly possible that the Fed would have to organically grow its balance sheet earlier than previously thought.

LOOKING TO THE OCTOBER MEETING:

The minutes will be looked at by traders for clues about the conditions that the Fed needs to see to trim rates further, with the so far resilient consumer being closely monitored; incoming data has seen the probability of an October rate cut rise, and as high as around 90% in light of the weak ISM surveys; however, that pricing was pared after the September jobs report, which was mixed (139k jobs added with upward revisions, but average earnings Y/Y dipping to 2.9%). Post the mixed data, UBS, amongst others, now sees a 25bps rate cut at the 30th October FOMC, as well as a more data-dependent Fed; the bank also sees a resumption of “organic” balance sheet growth. Although at the same time, Fed officials have not been sounding the panic alarms in recent remarks; heavyweights John Williams and Richard Clarida have both spoken of the strong US economy/consumer (retail sales on October 16th will be a crucial update), whilst continuing to express their meeting-to-meeting approach. Participants will also be looking for further suggestions about a permanent standing repo facility, if the minutes reveal more talk in respect of adding another monetary policy tool – Clarida has since said the facility will continue to be discussed – or the Fed prefers to maintain temporary operations as Powell noted in his presser.

For context, since the first overnight repo operation on September 17th, and through quarter-end, demand has decreased with the operations undersubscribed so far in October, giving credence to the notion that the pressures were of a temporary/technical nature. However, there lies more potential “repo squeeze” dates ahead in Q4 – October 15th sees coupon settlements alongside one- and two-month bill settlements (Reuters also highlights potential GSE flows); participants will be cognizant of whether the Fed continues to step in and whether the repo market and other funding markets have a repeat of September’s fiasco.

TRADE:

Trade developments remain the overhanging dagger to the US/global economy, in addition to Fed policy. Officials continue to cite trade tensions as the largest risk to the outlook. The September rate cut was partly in response to trade tensions and the minutes will be examined for any clarity on how Fed officials are navigating the ever-changing landscape. However, said minutes may prove stale by the weekend, as the much-anticipated US-China trade talks are to take place between Thursday and Friday in Washington; from a complete breakdown of talks alongside a ramp up of tariffs, to an all-round trade deal with breakthroughs on key areas, there are a multitude of permutations investors need to consider, albeit developments at the beginning of this week suggest the slim likelihood of the latter. With the Trump administration ramping up its trade conflict with the EU, and China remaining the ever-present wildcard, the Fed will have to continue incorporating trade factors in policy – arguably more so – in meetings ahead.

POMO:

Fed Chair Powell on Tuesday (‘A view from the Fed’, before the NABE’s 61st Annual meeting) announced the “time is upon us” to add to reserve supply over time and to expand the balance sheet to maintain an appropriate level of reserves. Powell emphasized the measures were not QE as the purchases would be concentrated in the short end of the curve in order to alleviate any tensions in money markets (compared to previous buying further out the curve designed to suppress yields). Elsewhere, Powell spoke to the strong US labor market and consumer, whilst reiterating a  data dependent/meeting-by-meeting approach to sustain the  expansion – not quite confirming market expectations of an October cut, although the balance sheet announcement saw the Treasury curve steepen, regardless.