September 18, 2019 / 6:28 PM / 3 months ago

Fed cuts rates again, gives mixed signals for next move

NEW YORK (Reuters) - The U.S. Federal Reserve cut interest rates by a quarter of a percentage point for the second time this year on Wednesday in a widely expected move meant to sustain a decade-long economic expansion, but gave mixed signals about what may happen next.

HIGHLIGHTS:

** Fed cuts target interest rate 25 basis points to a range of 1.75-2.00%

** Median Fed policymaker projection is for no further cuts in 2019 but seven of 17 policymakers saw one more cut as appropriate

** Fed sets interest on excess reserves rate at 1.80%, widening the spread from top of target range to 20 bp from 15 bp, to better control its policy rate

** Fed sets offering rate for overnight repos at 1.70%, 5 bp below bottom of fed funds target range

MARKET REACTION:

STOCKS: U.S. stocks recovered from a selloff after the announcement, with the S&P 500 .SPX ending unofficially up 0.03% after Fed Chairman Jerome Powell concluded his press conferenceBONDS: The 10-year U.S. Treasury note US10YT=RR yield rose to 1.7926% and the 2-year yield US2YT=RR rose to 1.7498%

FOREX: The dollar index .DXY added to slight gains, last up about 0.3%

LUKE TILLEY, CHIEF ECONOMIST, WILMINGTON TRUST

“Basically some of the signals from the funding market and the language today means we might be at the point where we need to be adding liquidity. That’s an interesting thing to digest and for markets to deal with is that the Fed will be adding to its balance sheet but it’s not the same as Q/E. That was something that became a little bit of a possibility over the past 48 hours and now that he’s said it explicitly we can start thinking about it. That should bring a little bit more comfort to markets. That’ll take a little more time to sink in, what that means for investors”

RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, NEW VERNON, NEW JERSEY

    “This type of reaction we see almost every time from the Fed decisions. The first move is from the people who think it’s not enough, and at the end of the day people conclude that they did exactly what investors expected them to do. Those people who got what they expected used the selloff to buy, and I think that’s what happened here.”

    “Nothing really changed from yesterday to today and the move was pretty well telegraphed.”

    “The bottom line is (Powell) didn’t say anything that negative. You think about what he presented, it’s status quo.  People thought about it, they thought about the fact that rates are going lower, that normally is supportive for stocks.”

SEEMA SHAH, CHIEF STRATEGIST, PRINCIPAL GLOBAL INVESTORS, LONDON (EMAILED)

“Powell had a tougher task on his hands today than usual. With market participants concerned about the liquidity shortage that has hit recently, Powell had to provide some reassurance that the Fed is on top of it. Certainly, the Fed has the tools to deal with this issue, and it does not reflect an underlying weakness in the economy nor is it a systemic issue. However, questions may arise about why the Fed has delivered such a large reduction in the IOER – does it imply the stress on the monetary transmission mechanism is actually higher than most believe?”

“What’s more, an IOER cut is simply a temporary bandaid for the solution and the Fed will need to come up with a more permanent solution going forward. Expanding the Fed balance sheet features in the menu of possible solutions, and Powell made a strong effort to communicate clearly that it should not be interpreted as quantitative easing, aka policy stimulus, rather than a technical tool to increase to currency in circulation.”

JASON PRIDE, CHIEF INVESTMENT OFFICER, PRIVATE WEALTH, GLENMEDE, PHILADELPHIA

“The dot plot is probably what caused some concerns in the initial impression. The median dots show two rate cuts in 2019, which implies that the Fed is done. That’s the median dot. But the dispersion of members has increased. Some may be more conservative in a survey because they don’t necessary want to show that they’re committing to all the rate cuts in case the signal from economic information doesn’t turn out (as expected). I’d caution anyone from reading too much into the dot plot.”

MARK GRANT, MANAGING DIRECTOR AND CHIEF GLOBAL STRATEGIST, B. RILEY FBR, INC, FT LAUDERDALE, FLORIDA

“The Fed’s cut was in-line with consensus expectations. Their future outlook will certainly not please our president. Chairman Powell’s position that we are in a ‘mid-cycle adjustment’ seems to be what has driven the Fed to their conclusion.

“What is missing in their statement is a recognition that American rates are so much higher than European and Japanese rates and the effect that this has on our economy. It is almost as if they are purposefully ignoring the collateral damage that this is having on the dollar and on American corporations.

“However, having said that, they still are fostering a ‘Borrower’s Paradise’ in the United States while creating the exact opposite condition for investors who can only achieve very low yields and hence low cash flows which is a negative for retirees, seniors, insurance companies, banks, pension funds, mortgage lenders and other companies in the financial industry.

With today’s statement the Fed has continued to foster a ‘Financial Paradox’ where borrowers are empowered and fixed-income investors are pushed into the corner. We are, in fact, I would assert, between ‘the rock and the hard place.’ The Fed has taken a very different position than the ECB and so our central bank is doing much less to help our economy that the European Central Bank. Something, at some point, has got to give.”

GREG MCBRIDE, CHIEF FINANCIAL ANALYST, BANKRATE.COM, NEW YORK

“Despite strains in money markets that have forced Fed intervention this week, there is no indication of any imminent return to quantitative easing and balance sheet expansion.”

JON HILL, INTEREST RATE STRATEGIST, BMO CAPITAL MARKETS, NEW YORK

“They cut 25 basis points as expected, they lowered IOER (interest on excess reserves,) which we were also anticipating. We’ve been a little surprised about no discussion or indication of a standing repo facility, or a return to asset growth. We would expect Powell to be getting that question very quickly around 2:30 pm and I think they will use that as the outlet to update forward guidance. In terms of the dots, the fact that they don’t indicate any additional cuts we’ll take with a grain of salt. Keep in mind that back in June there was no indication they were going to cut the rest of this year either, and really the language in the statement remains that they will act as appropriate. So if in the next 90 days conditions deteriorate further, inflation expectations remain low, we will expect to see the Fed cut again.”

“I think the market’s interpreting it incrementally a bit hawkish and we see that in a few different ways. One, the curve is flattening and breakevens are falling…The SEP indicates a base case for no more cuts this year, rather than having members base case be one more cut to get to 75 (bps) in total, it’s an expectation of flat. The other thing is the lack of urgency by no announcement of a standing repo facility or asset growth. I would say it’s a little premature on the balance sheet topic, just because we will have to see what Powell says here. I think what this does is, for the time being, as long as there is an indication of stress in the market, the Fed is obviously willing to run these emergency repo facilities.”

TIM HORAN, CHIEF INVESTMENT OFFICER – FIXED INCOME, CHILTON TRUST, NEW YORK

“It is perhaps a little more hawkish than what the market was hoping for. I think it’s an acknowledgement that there is a range of opinion within the policymaking apparatus here. And (Powell) is trying to pull together that consensus and acknowledge those risks for the intermediate term of the economy – acknowledging that the trade issue is not solved yet, acknowledging that global growth is clearly slowing down.”

“If you look at our own U.S. numbers, what stands out is that inflation has been moving up and that’s slightly at odds with the stronger dollar that we’ve had. You would expect that the strong dollar would keep out import price inflation. But it’s an acknowledgement that within the basket of goods and services out there, there is an inflation creep that’s going on. It’s not a problem but in a way it cuts against the grain of a Fed that is doing anything more than a mid-cycle correction.”

KRISTINA HOOPER, CHIEF GLOBAL MARKET STRATEGIST, INVESCO, NEW YORK

“This harkens back to a comment that Richard Clarida made not too long ago, where he said that the Fed is going to take this one meeting at time. It’s really clear that’s exactly what is happening because there’s such a difference of opinion on the Fed. It’s going to be data-dependent, it’s going to be trade policy dependent and we’re not going to have a lot of visibility on the next move because seven of the 17 have a policy prescription of another rate cut this year, while we have some who don’t think the Fed should have cut rates this time.

“This is going to be, I don’t know if I should use the term ‘knife fight,’ but it sounds like it’s going to be a robust debate at every single FOMC meeting.

“I do believe more accommodative monetary policy is supportive of risk assets like stocks, so any short-term weakness is going to be just that, very short-lived.”

JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL, SALT LAKE CITY 

“It is a fairly muted response (from stocks). It was right down the fairway. Going into the meeting the futures market was pricing in a cut and it was delivered. I think that (repo) was somewhat unexpected and the fact that that happened leading up to the decision added a layer of complexity. Almost no change in the September policy statement vs. July. That’s a bit striking.”

CHARLIE RIPLEY, SENIOR INVESTMENT STRATEGIST, ALLIANZ INVESTMENT MANAGEMENT, MINNEAPOLIS

“That the Fed would cut by 25 basis points was pretty much a shoo-in. The amount of dissenters, two in favor of not cutting and one dissenter in favor of cutting further, I thought was particularly interesting. It points out how divided the Fed really is as to where policy should be headed in the future. You can clearly see that through the dot plot. The market seems to not be believing that (the dot plot), with how the 10-year Treasury is reacting to this news. Stocks came in from where they were before, which is likely a reaction to the dot plot showing no cuts through 2020.”

DOUG PETA, CHIEF U.S. INVESTMENT STRATEGIST, BCA RESEARCH, NEW YORK

    “What I thought was telling is that the ‘dot plot’ indicates that we have 10 voters saying no more cuts or actually a hike between now and the end of the year, and we have seven voters who are saying one more cut. But then when you look beyond 2019, there’s not a single voter who says any more than one cut... That one remaining cut is three cuts fewer than the money markets had been pricing in over the next 12 months.”

    “What the Fed is saying is we are not going to cut as much as what the money markets have been projecting and at least in the immediate reaction that is what you are seeing in the two-year note.”

MICHAEL ARONE, CHIEF INVESTMENT STRATEGIST, STATE STREET GLOBAL ADVISORS, BOSTON

“The two biggest takeaways in the early going are the number of dissents and the fact the dissents are opposing each other suggesting the Fed can’t reach a consensus on its own. So the future of monetary policy remains uncertain and it seems as though the Fed officials themselves can’t agree on how to move forward. The second key takeaway from my perspective is this does look to confirm Powell’s assessment that it is a mid-cycle cut because they don’t have any additional cuts in 2020. I’m surprised the market isn’t reacting more negatively to that because the market had priced in four rate cuts in total, another 1% between now and the end of next year, and that is not what the Fed is signaling at all and so far investors are taking that in stride.

“What may have happened is last week the economic data was a bit stronger than expected, whether it be small business optimism, consumer confidence, retail sales, the inflation data, so investors might have convinced themselves that perhaps the economy wasn’t doing as poorly as first judged. The second thing is the ECB, in their monetary policy, didn’t choose their nuclear option, they were a little more conservative than some had anticipated so maybe investors were kind of bracing themselves for that. Third, you have this thawing in US-China trade negotiations and perhaps that is leading to the belief you may not need as many cuts if the U.S. and China can reach a trade agreement. Fourthly, you have markets within a whisker of all-time highs at the end of last week. All four of those things, perhaps folks felt like you didn’t need as many cuts as was priced in.”

JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON

“Another rate cut from the Fed to try to shield the U.S. economy from global headwinds. Today’s move was more of a hawkish easing in that the Fed’s median forecasts for rates suggested no more cuts this year, while some officials dissented. The tone of the Fed’s new forecasts remained largely sanguine despite the global risks. Consequently, the dollar isn’t likely to stray far from recent highs.”

DAVID CARTER, CHIEF INVESTMENT OFFICER, LENOX WEALTH ADVISORS, NEW YORK

“The Fed’s move was unsurprising. It was well-telegraphed by the Fed but I’m not sure it will be that impactful. Rates have been driven to low and even negative levels in Europe and this hasn’t led to much growth.”

“The impact of the Fed’s decision may be muted as loose monetary policy may be offset by the effectively tight trade policy. Guidance on future rate moves, however, remains critical.”

“(The Fed) said we’re lowering rates but gave a mixed message about future moves. However, the press briefing is often informative.”

JOHN DOYLE, VICE PRESIDENT OF DEALING AND TRADING, TEMPUS INC., WASHINGTON

“I think the divide will be the story: two for no cut and one for a 50 basis-point cut. The first triple dissent since 2016 will have us all scratching our heads which is partially responsible for the dollar’s choppiness.”

ALAN LANCZ, PRESIDENT, ALAN B. LANCZ & ASSOCIATES, TOLEDO, OHIO:

    “The main concern (for stock investors) is there might not be another cut, and that’s why you had a little bit of a selloff. But it’s almost like selling on good news. They left the door open for more cuts. It’s a really divided Fed right now.

   “It confirmed the domestic economy, at least, is continuing to chug along.”

Compiled by Alden Bentley

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