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A ‘Hawkish Cut’ From A ‘Derelict’ Fed? What To Expect From The October FOMC

Will it be "three and out"?

The Fed will cut rates for the third time in three meetings this week. If they don’t, they’ll blindside markets and incur the wrath of an increasingly irritable Donald Trump, who last week declared that policymakers would be “derelict in [their] duties” if they sit on their hands.

“We believe the mixed growth data since the last meeting more closely resembles the Committee’s baseline forecast than the downside scenarios under discussion”, Goldman writes, in their Fed preview (called “three and out?”). The bank expects “only minor changes” to the statement with regard to the growth outlook.

Here’s a snapshot of how the data has evolved:

(Goldman)

The September meeting betrayed a divided committee as Esther George and Eric Rosengren reiterated their dissents from July, while Jim Bullard argued for a larger, 50bp cut. Minutes from the meeting detailed the rift.

“Comments from Fed officials continue to indicate a diverse set of opinions about the appropriate policy stance, with many implying scope for additional cuts beyond October’s, but others professing skepticism about the easing already delivered”, Goldman went on to say last Thursday. The bank expects dissents from George and Rosengren again.

(Goldman)

If you ask Goldman (and this prediction was touted by CNBC), the Fed will likely drop the “act as appropriate” language from the statement to indicate another cut in December is not a foregone conclusion. Clearly, that would send a hawkish message to markets, and may be tempered with language that reminds everyone of how much the committee has already done despite little in the way of an economic justification.

“Because even the leadership does not appear to view a fourth cut in December as the default outcome, we expect the statement to drop the pledge ‘will act as appropriate’, a phrase that the market interprets as signaling a cut at the next meeting”, Goldman says, adding that it may be replaced with a nod to the stimulative effects of the cuts already delivered and “with the following less committal guidance: ‘will act as needed to promote its objectives'”.

For their part, BofA expects the language to remain consistent, at least in terms of forward guidance. The Fed will note that “‘[a]s the Committee contemplates the future path…for the federal funds rate, it will continue to monitor the implications of incoming information…’, suggest[ing] that the Fed remains open to the possibility of further rate cuts”, the bank says in their preview of the October meeting. “If the Fed tweaks the statement to note that the Fed believes that the current rate of policy is appropriate and does not indicate that they are ‘monitoring’ data, it will be a hawkish surprise, suggesting that the Fed is likely on hold”, the bank goes on to remark, while noting that “We do not think this is the message that Fed leadership would want to send”.

The October FOMC meeting comes more than six weeks after an acute squeeze in short-term funding markets forced the Fed to intervene with overnight and term repo operations. On October 11, the Fed officially announced the commencement of “organic” balance sheet expansion (“QE Lite”, as it’s affectionately known) at an initial pace of $60 billion per month, with the aim of alleviating reserve scarcity.

Although Powell will certainly be asked to deliver an update on that during the press conference (his performance in that regard last month was characteristically lacking), there likely won’t be a mention of it in the statement.

“Look for Powell to reinforce the key words of ‘technical’ and ‘organic’ when describing the reasons behind balance sheet growth”, BofA says, noting that he’ll “be clear that it is different than QE [but] may be pushed on some of the implementation challenges, particularly the question of whether or not there will be enough supply to meet the Fed’s demand for T-Bills”.

It’s highly unlikely that the calming of trade tensions since the September meeting will dissuade the Fed from squeezing in another “insurance” cut. “Strong signaling from Fed leadership indicates that the modest trade war de-escalation has not deterred them from completing a 75bp, 1990s-style ‘mid-cycle adjustment'”, Goldman said.

The so-called “Phase One” trade deal is nebulous in the extreme and although it appears likely that Trump will make a show of signing something with Xi Jinping at APEC in November, markets will remain skeptical. Indeed, some surveys indicate that most market participants believe trade tensions between the US and China are the new normal. In any case, it’s too late to rescue the global economy. The only question is whether the downturn morphs into a recession proper.

Read more: Will Trump Give Up His Leverage Over Jerome Powell To Secure A Deal With Xi?

Goldman (and others) ultimately expect the December tariff escalation to be delayed and indeed, there was more than a little chatter about that last week.

Still, it’s far from a sure bet, and even if Trump does announce that the scheduled imposition of duties on $160 billion in Chinese goods is off the table, the president has been known to change his mind. That escalation, if it goes forward, would come within days of the December FOMC meeting.

“Recent softer US data would justify the October cut [but] the temporary easing of global risks reduces the need for further insurance, and the Fed could signal more willingness to follow a ‘meeting-by-meeting’ approach”, Barclays mused late last week, adding that “a mildly hawkish cut could bring minor support to the USD”.

And that, right there, underscores one risk. The dollar has been on the back foot lately, and Trump likely won’t be pleased if a “hawkish” cut changes that.

It’s worth noting that retail sales declined for the first time since February in September, and the outlook for the manufacturing sector remains tenuous, although the latest Markit PMIs weren’t a total disaster. ISM and, of course, the jobs report and GDP, are on deck this week.


 

1 comment on “A ‘Hawkish Cut’ From A ‘Derelict’ Fed? What To Expect From The October FOMC

  1. vicissitude

    Related topics: “Total Public Debt Cash Redemptions Withdrawn from Federal Reserve Acct” —

    Apparently, Withdrawals represent money spent by the federal government through each of various agencies and programs.

    T3B | (Adjustment of Public Debt Transactions to Cash Basis): This table converts sales and repayments of debt into a cash line item showing their impact on the Treasury’s Federal Reserve Account in Table II:

    Not all debt issued by the U.S. government is subject to the Congressionally-mandated “debt limit.” By law, certain types of debt are exempt from the limit, like debt held by a Treasury subsidiary, the Federal Financing Bank.

    Table III C takes the total public debt outstanding – the sum of debt held by investors and internal governmental I.O.U.s – and adjusts it by subtracting exempt debt types like the Federal Financing Bank. The total public debt is calculated in the first two line items, by adding up debt held by the public and intragovernmental holdings. This total is then decreased by exempt holdings listed below, such as the Federal Financing Bank, to arrive at the total debt subject to the debt limit in the bottom of the table. The prevailing debt limit is listed below that total, showing how close the government is to breaching the limit. __ The data can be accessed in Treasury.io by querying table “T3C” – short for Table III C

    DAILY TREASURY STATEMENT
    Cash and debt operations of the United States Treasury
    Thursday, October 24, 2019

    TABLE I Operating Cash Balance
    Federal Reserve Account

    TABLE II Deposits and Withdrawals of Operating Cash
    Federal Reserve Earnings
    Total Federal Reserve Account
    Transfers from Federal Reserve Account

    TABLE III-B Adjustment of Public Debt Transactions to Cash Basis
    Deposited in Federal Reserve Account
    Withdrawn from Federal Reserve Acct.

    TABLE III-C Debt Subject to Limit

    Total Public Debt
    Subject to Limit 22.897 Trillion (oh but wait, what about the $21.988 trillion limit? )

    *Statutory debt limit temporarily suspended through July 31, 2021

    https://fsapps.fiscal.treasury.gov/dts/files/19102400.txt

    See: Updated August 29, 2019

    The limit was reset on March 2, 2019, at $21.988 trillion to accommodate federal obligations during the suspension period. On March 4, 2019, Treasury Secretary Steven Mnuchin invoked extraordinary authorities. As noted above, the 2019 debt limit episode was resolved on August 2,
    2019 with enactment of the Bipartisan Budget Act of 2019 (BBA 2019; P.L. 116-37; H.R. 3877), which suspended the debt limit until July 31, 2021.

    https://fas.org/sgp/crs/misc/R43389.pdf

    So, after that confusion, it’s interesting to look at lots of charts @ economagic, but I’m not sure their charts are generated by data @ FRED … so working on that. Nonetheless, looks like some strange things going on with cash. Economagic has charts that show trends in TABLE III-C Debt Subject to Limit here:

    http://www.economagic.com/em-cgi/data.exe/TreasDTS/day-TIII-C06@@wklysum

    What does this imply about the debt ceiling and the Fed lower rates — and how does this fit into the trump balanced budget? Duh … Do we have an accountant anywhere that can explain this to 3rd graders?

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