At Halloween a Fed Funds Rate Cut This Way Comes
At Halloween a Fed Funds Rate Cut This Way Comes
Next Thursday, Oct. 31, Halloween, investors will likely see a 25 basis points reduction to the Federal funds rate from the Federal Open Market Committee, when it meets that day. It would drop to a range of 1.50%-1.75%. My sense is the market spies a treat, not a trick. Don’t say we didn’t warn you.
With the Fed futures market signaling a 93% probability, it’s almost a done deal. The FOMC pays close attention to the Fed futures markets as the pulse of investor thinking, past meeting minutes have shown. If the committee wanted to show investors it disagreed with that probability it would have made quiet but definitive noises about it by now. I shudder to think what would happen in the unlikely event the FOMC doesn’t cut. That would be a Halloween to remember.
Economic reports, which is what the data-dependent Fed says it looks at, continue to suggest a cut is on the way. Global business activity is still slowing. For example, Sept. U.S. orders for long-lasting goods fell, due partly to transportation equipment, reflecting a General Motors (GM) strike and the grounding of Boeing’s (BA) 737 Max airplane. The eurozone, meanwhile, is close to stagnation in October, while activity declined in Japan, thanks to higher tariffs and slower investment spending.
On Nov. 1, European Central Bank President Mario Draghi will hand over the rein of an institution riven by internal division to Christine Lagarde. Given his departure, there are doubts about his new giant bond-buying program, launched last month. The ECB’s balance sheet is now roughly 40% of eurozone annual economic output, twice the Fed’s share.
Meanwhile, the Bank of Japan Gov. Haruhiko Kuroda has recently pointed to the possibility of additional easing. Last month the bank promised to take a more thorough look at the economy before its Oct. 30-31 policy meeting.
The New York Fed continues to add tens of billions in permanent and temporary liquidity to financial markets through overnight repos and loan operations, as part of an effort to dampen volatility in short-term rate markets with temporary and permanent injections of liquidity.
The central bank said it is boosting the amount of temporary liquidity it is willing to make available to financial markets starting last week to $120 billion from about $75 billion. “to mitigate the risk of money market pressures that could adversely affect policy implementation.”
The U.S. Treasury 10-yr note yield was around 1.80%, up from 1.75% one week ago.
Upcoming: 10/30-31 - FOMC meeting.
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