The Federal Reserve’s policy and rate-setting committee, the Federal Open Market Committee, meets today and tomorrow for the seventh of eight regularly scheduled yearly meetings.
At the conclusion of their meeting, the committee issues a press release, generally referred to as the FOMC Statement, outlining its economic outlook, policy decisions, and targets for the federal funds rate.
The chairman of the Federal Reserve, who heads up the FOMC, by statute, holds a press conference four times a year after the FOMC meets. However, in June 2018 Fed Chairman Jerome Powell announced he would hold a press conference after every FOMC meeting in 2019.
But you don’t have to wait until tomorrow to know what’s going to happen with rates and see how the market’s going to react.
The Fed Will Ride Markets as Long and High as It Can
First of all, after cutting rates twice this year, which is the first time in eleven years, at their July meeting and again at their September meeting, the FOMC’s going to announce a third 25 basis point cut to the fed funds rate, setting the target range at 1.5% to 1.75%.
According to the fed funds futures market today, there’s a better than 93% chance that there’ll be a cut.
Of course, there’ll be a cut, because the markets expect one and the Fed has no intention of tanking equity or bond markets by surprising them by not cutting.
It’s only going to be a 25 basis point cut and not a 50 basis point cut because a 50 basis point cut is completely unnecessary (a 25 basis point cut is unnecessary too, but it’s coming), because a 50 basis point cut would signal the Fed sees something bad that markets don’t see, and that would freak out equity and bond markets.
Considering the Fed’s self-imposed mandate to always try and float markets higher, they wouldn’t shoot themselves in the foot that way.
To justify this cut the Fed’s going to cite inflation being under its made-up 2% target, weaker manufacturing (the ISM’s September index reading came in at 47.8), and the unknowns for domestic and global growth based on the ongoing U.S. and Chinese trade war.
Blah, blah, blah. It’s all expected.
What may not be expected, and according to me will have to be announced, is that the Fed’s going to cut the IOER. That’s Interest On Excess Reserves.
IOER has to be cut, because banks have about $1.4 trillion parked at their Regional Federal Reserve Banks collecting as much as 1.8% interest on overnight deposits.
That money must come out of safekeeping and be put to work in the economy by banks, for the sake of credit expansion and, more importantly in terms of the financial system, for the sake of free-flowing interbank lending in the fed funds market.
Another unexpected announcement may be a straight-up admission that the Fed’s going back and big into the QE game.
It has to, so it might as well announce it.
The Fed’s Endgame Does Whatever It Takes
Quantitative Easing, the high faulting, policy-sounding excuse that the Fed gave the world for buying trillions of dollars of bonds and mortgage-backed securities from bleeding banks, who were all technically insolvent during The Financial Crisis (yeah, that deserves capital letters), is necessary again.
That’s because banks aren’t lending to each other; that’s because they’re collecting risk-free interest by parking their “assets” at the Fed.
That’s why repurchase agreements, or repos, conducted in the fed funds market, where the Fed is supposed to control the fed funds rate, which is supposed to be 1.75% – 2.00%, cost banks who needed to borrow from each other as much as 9% last month.
Since cutting IOER too much would enrage banks, the Fed will resort to QE to inject much needed liquidity into the interbank lending market. Only, they’re not really injecting money into the interbank lending market, QE is their direct handout to needy, greedy banks.
The good news for markets is that QE is a very bullish, for just about everyone, at least as long as it lasts.
What’s unknown and making markets nervous is what forward guidance the Statement may contain and what Chairman Powell may address in the press conference Q&A session.
To calm markets and promise, wink, wink, they’ll cut regardless of how good the economy looks if they see markets falling, they’ll say, as they have the last two meetings that they “will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”
Blah, blah, blah.
Investors and traders are going to parse every sentence and word and buy or sell accordingly.
I’ve just told you what they’re going to say and what they’re going to do.
It’s bullish. It’s been bullish. It will be bullish.
Interest rates and Fed policy aren’t the market’s problem. The Fed is the market’s best friend.
Unless buyers go on a temporary strike giving shorts the upper hand trying to push markets down, as it sometimes happens on the heels of an FOMC meeting, the direction for stocks is up.
Thank you, Federal Reserve of the status quo, protector of banks and bank oligarchs everywhere, and coddler of markets.
It almost makes me think I’m wrong for wanting free markets back.
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