06 Nov AS EXPECTED THE FED MEETING WAS A NON-EVENT
The FOMC meeting was largely a nonevent. There was no change in interest rates and made no change to asset purchases. The Committee essentially reiterated the prior meeting statement of “economic activity and employment have continued to recover but will remain well below their levels at the beginning of the year.”
The FOMC also restated “the ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”
Some are beginning to opine the Fed Funds rate is becoming less of a factor given the massive amount of excess bank reserves, now amounting to about $4 trillion. Before the financial crisis reserves were between $1 and $2 billion.
The Fed commenced paying interest on excess reserves in October 2008 at the onset of the financial crisis in an attempt to increase capital of the money center banks via no risk loans.
As recently as March 2, the Fed was paying member banks 1.60% on these reserves, moderately lower than 2.40% rate paid in July 2019. The rate was slashed on March 16 to a range of 0.00% to 0.10%.
Because of the massive amount of excess reserves, reserves that are not earning any interest, this should encourage banks to lend. If lending commences, monetary velocity or the turnover of money will accelerate, hence economic activity. The St. Louis Fed suggests that if monetary velocity increases to 25% of the historical pre-2008 level, economic growth would be in excess of 30%.
Wow! To write the obvious, if the Fed increases this rate it would quietly discourage lending.
I also think it is noteworthy that interest not being paid on these reserves could suggest the Fed is not overly concerned about bank capital levels and loan losses.
As noted the outcome of the meeting was a nonevent with the market’s focused on the outcome of the election. The markets are suggesting the current outcome is the most desirous, equivalent to nirvana.
The NASDAQ 100 is up an incredible 7.1% since the election and 9.1% for the week, one of the greatest weekly gains on record according to Bloomberg. But are we really in utopia? Bloomberg writes “most members of the S & P 500 fell on both Wednesday and Thursday.”
Speaking of the election, the Committee made no comment about the environment, an environment that could potentially take an infinite number of directions. Arizona, Georgia, North Carolina, Nevada and Pennsylvania are still in play. Will legal actions alter the current good feelings? Georgia’s Voting Information Manager commented a recount is all but inevitable.
Speaking of which, there is the potential unprecedented dual runoff for Georgia’s two Senate seats. Given the ramifications of the possible outcome, Bloomberg writes Georgia could attract more than $1 billion in political spending and “armies of campaign volunteers, strategists, and lawyers.”
What will happen today? October’s jobless data is released. The unemployment rate is expected to decline to 7.6%, a 585k and 685k increase in non-farm and private sector payrolls is forecasted as is 0.2% increase in hourly earnings, a 34.7 workweek and 61.5% labor participation rate. Will any attention be focused on the data or will election continue to remain front and center?
Last night the foreign markets were mixed. London was down 0.15%, Paris down 0.72% and Frankfurt down 0.88%. China was down 0.24%, Japan up 0.91% and Hang Sang up 0.07%.
The Dow should open moderately lower open on election uncertainty. Perhaps the only concrete comment to make is anything that is written or stated will be viewed in a political lens. The 10-year is off 3/32 to yield 0.80%.