Federal Reserve Lower Rates 25 bps as Expected, Moderate Economic Growth

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    Helmholtz Watson

    The Federal Reserve as expected cut rates to…


    Helmholtz Watson

    Fed’s Powell statement

    Rate cut was due to developments and insurance against risks
    Notes lower growth abroad and trade developments
    Elevated uncertainty has weighed on business investment
    We expect economy to continue to expand at a moderate rate
    Notes falling manufacturing output
    Pace of job gains has eased this year but we expected some slowing
    Participation in labor force has been increasing
    We expect the jobs market to remain strong
    We still expect inflation to rise to 2%
    Inflation pressures clearly remain muted, we’re mindful that continued below-target inflation could lead to a downward slide in long-term inflation expectations
    Since last meeting we’ve seen additional weakness abroad and a rise in trade tensions
    Future course of policy will depend on how economy evolves
    Rates are not on a pre-set course and that is certainly the case today
    Higher rates on short-term rate were due to corporate tax payments and bond settlement
    Issues in rates market do not effect economy or path of rates
    Fed repo facilities were effective

    Helmholtz Watson

    Powell Q&A:

    Asked about ‘mid-cycle adjustment’ says they see a favorable economic outlook
    Notes that there are risks to a positive global outlook and says that if economy does turn down then deeper cuts would be appropriate
    We’re going to be highly data dependent and we’re not on a pre-set course
    We’re going to be looking carefully meeting by meeting
    Powell particularly monitoring global growth and trade developments, we see those risks as more heightened
    This is a time of difficult judgements and disparate perspectives
    The bulk of the committee is taking decisions meeting by meeting
    Fed will be very closely monitoring market developments regarding appropriate level of reserves but there is real uncertainty
    It’s certainly possible we will need to resume the organic growth of the balance sheet sooner than expected, that’s always been possible
    Economy has performed roughly as expected lately
    Global economy has weakened in Europe and China
    Trade policy changes have led to big swings in sentiment in the inter-meeting period

    Helmholtz Watson

    Citi on FOMC

    median dot in 2020 showing no change and hikes for 2021 and 2022
    Fed has softly signaled this may be the end of their easing
    Remain USD bulls

    Helmholtz Watson

    [b]BNZ on FOMC
    market has taken the statement as hawkish relative to expectations
    dissents were in both directions
    George and Rosengren arguing for no cut (again)
    Bullard argued for a 50bps cut
    median “dot” is consistent with no further reduction rates this year or next
    minimal changes to the Fed’s economic projections
    policy outlook statement was unchanged from July
    The only changes made to the statement were the acknowledgement that household spending had been rising at a strong pace while business investment and exports had weakened
    press conference, Chair Powell… When asked whether the FOMC still had an easing bias, Powell said “we don’t” and argued that policy will be data dependent.


    [b]Fed’s Mester says If prices are becoming more flexible due to things like Amazon, monetary policy is less effective
    – Idiosyncratic factors affecting labor market and inflation

    US monetary policy has been more accommodative then in the past
    at some point there are unintended policy consequences of running and economy too hot
    running economy so hot is forcing firms to turn to automation more quickly
    Fed does have to take financial stability concerns into account when setting monetary policy
    Non financial debt, commercial real estate levels are currently of moderate concern
    Concerned some people are not aware politics does not affect monetary policy decisions

    Helmholtz Watson

    FOMC Minutes of September 17-18 2019 FOMC meeting

    Many Fed officials cited inflation in justifying Sept cut
    Officials pointed to economic outlook risk management and inflation objectives
    Several said models on likelihood of recession in medium term had increased notably
    Policymakers generally more concerned about risks associated with trade tensions, geopolitics and global economy
    Clearer picture had emerged on weakness in investment, factories and exports
    Readings on labor markets and overall economy strong
    Several policymakers favored keeping rates steady, saying baseline projections had changed very little and that uncertainties would not derail expansion
    A couple policymakers said a rate cut might be too much insurance
    A few policymakers said markets were pricing in more future accommodation than what they see as appropriate; might need to better align expectations
    A couple of participants raised the concern that keeping policy rates low for a long time could lead to excessive risk-taking in financial markets and threaten financial stability.

    Several participants suggested that the Committee’s post meeting statement should provide more clarity about when the re-calibration of the level of the policy rate in response to trade uncertainty would likely come to an end.

    The minutes showed a debate emerging on when to stop the easing cycle. A highlight for me is that ‘several’ wanted to keep rates steady. That indicates a good chunk reluctantly went along with the September plan to ease but they might not be so happy to continue playing along.

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