It is all but assured that the FOMC will lower rates by 0.25% on Wednesday. Perhaps the most significant outcome of the meeting will be each individual member’s outlook for economic growth, inflation and the neutral interest rate…aka the dot plot.
Dissention is great amongst Committee members, the result of the tectonic changes that are taking place in the global eco sphere. The neutral rate—the rate that neither constricts nor simulates growth—is widely debated. As noted last week at the conclusion of the September there were 11 different estimates from the 19 members ranging between 2.6% and 3.9%, a huge disparity that has a great impact upon longer duration debt.
The Fed is expected to end quantitative tightening this month by reinvesting maturing mortgages into Treasuries rather than letting them run off. Ultimately, cutting interest rates to ease financial conditions while at the same time reducing the balance sheet works at odds with one another, so this ending was perhaps viewed as inevitable.
The Fed reduced its balance sheet from $9 trillion mid-2022 to $6.5 trillion today while simultaneously moving rates up 500 bps and having the economy perform as it has is something that should not have occurred, an extreme anomaly equivalent to negative interest rates.
It is believed a major reason as to why to end QT is because of liquidity issues. Recent corporate tax payments and record Treasury settlements have depleted cash in the banking system for overnight lending in the repo market.
It is generally agreed that in order for the credit market to function smoothly, bank reserves of about 10% above nominal GDP are required. It is significantly below this figure, and it is believed that if reserves don’t rise again to this margin, QE may accelerate.
The question at hand will GDP increase at the rate of expansion of the balance sheet?
The unexpected is consistently occurring. The question as to why may only be answered by history.
Last night the foreign markets were mixed. London was up 0.01%, Paris down 0.15%, and Frankfurt up 0.23%. China was up 0.55%, Japan up 0.18% and Hang Seng down 1.23%.
Futures are flat. The 10-year is off 3/32 to yield 4.14%.
