The initial reaction to the September Fed decision was that the FOMC delivered a “hawkish cut”.
One analyst told Bloomberg in an e-mail that the committee has “softly” signaled that easing might have just come to an end. “[This] has all the hallmarks of a hawkish cut”, another said.
Rosengren and George were not shaken out of their dissents, the second paragraph in the statement did not suggest a predisposition to ease aggressively and, perhaps more notably, it doesn’t look like the Fed is in a hurry to address possible reserve scarcity, either. The dots are somewhat ambiguous, but suggest markets can expect one more cut, at most, unless the outlook deteriorates meaningfully.
Powell said the Fed would, “over time” provide sufficient reserves supply, but hint-dropping isn’t going to cut it for a market that just witnessed an acute funding squeeze tied to reserve scarcity.
“Funding pressures have no implications for monetary policy”, Powell said, adding that he “expects the funds rate to move back within the target range”.
“Do you think you underestimated the amount of reserves necessary for the banking system”, CNBC’s Steve Liesman asked Powell, during the presser.
“We’ve tried to assess [demand]”, Powell responded. “But yes, it’s certainly possible. We’ll be looking at this carefully in the coming days and taking it up at the next meeting”.
He did add that the Fed “may resume organic balance sheet growth earlier than originally thought”.
Again, that is not the sense of urgency markets wanted to hear, and Powell didn’t do himself any favors by calling the reaction to funding pressures “surprising”.
“This is disappointing”, TD’s Priya Misra chided, adding that Powell “is not addressing the structural issues at all” and worse, “is not acknowledging the reserve scarcity point”.
Stocks fell to session lows and the dollar rose.
Donald Trump was not amused. “Jay Powell and the Federal Reserve Fail Again”, he sighed, in an incredulous tweet delivered just minutes after the decision. “No ‘guts’, no sense, no vision!”, the president assessed.
As for Powell, Trump called the Fed chair “A terrible communicator!”
Stocks managed to pare losses and close flat, but after the bell, the New York Fed said it would conduct repo operations again on Thursday, underscoring the notion that even if Powell is keen to play down the funding stress, there’s more than a little concern in some corners.
Read more on the funding squeeze: