October 29, 2019
The Fed decides on monetary policy tomorrow.
The interest rate market is pricing in a 97% chance of a 25 bps cut — leaning heavily in favor of a third consecutive rate cut in this flip-flop campaign.
This, despite a very different climate than they entered for their September meeting, where they cut for a second consecutive time.
Then: In September, the uncertainty of an indefinite trade war was at peak levels.
Now: Three weeks later, Trump and the Chinese Vice Premier shook hands in the Oval Office on a limited deal.
Then: We were closing in on an October 31 deadline for Brexit that was looking like a “no-deal” was coming.
Now: Four weeks later, we have an agreement on Brexit terms between the UK and EU.
With these developments, what is the Fed thinking?
We did hear from the Fed Chair on October 8th at an economic conference. He made a few very important statements that should give us clues on what tomorrow’s announcement and press conference will look like — and these clues support the market’s view toward a rate cut.
Back on October 8th, Powell said:
1) “In the 90s the Fed added support to help the economy gather steam, that’s the spirit in which we are doing this (easing).” The Fed cut three times over a six month period starting in July of 1995.
2) “There are concerns surrounding business investment, manufacturing and trade.” On October 1, the ISM report showed that manufacturing contracted for a second consecutive month in September.
3) The “time is now upon us” to expand the balance sheet. The Fed is back to expanding the balance sheet in response to a disruption in short-term lending markets stemming from the Fed’s quantitative tightening program (i.e. the Fed is in the mode of reversing its over bad policy/overly-aggressive tightening mistakes).
So, despite the clearing trade war overhang, the above three comments from the Fed three weeks ago should keep the Fed on track tomorrow for another cut.