Will Fed Oct. 31 Meeting Be Trick or Treat? Likely the Latter

Vito J. Racanelli

When it comes to when and how much the Federal Reserve will change the Fed funds rate, who ya gonna believe, the Fed or the CME’s Fed fund futures trading?

After watching the Fed futures activity for years, I can say with confidence that markets have so far had a better handle on rates than even the Fed “dot plots” from the knowledgeable members of the Federal Open Market Committee. Over the past five years, time and time again, the futures turned out to be more accurate than the Fed itself, often times signally up to a year in advance that the Fed would eventually turn weak-kneed and cut, despite no-cut rhetoric often emanating from policymakers.

Currently, the CME futures say the probability is 68% that the Fed will cut another 25 basis points from the Fed funds rate at the end of the month, bringing the target band down to 1.50%-1.75%. That’s down from 80% the week before, but still up from 45% the week before that. This suggests that investors are having some second thoughts, but still look for a cut.

Moreover, investors should beware that there is some cognitive dissonance on the subject. You will see some Fed officials quoted as being against the cut or that it’s not a done deal. For example, let’s look at the Fed’s monthly minutes, released last week, from its Sept. 17-18 meeting, when the central bank approved a quarter-point rate cut to 1.75%-2.00%. They show that “a few participants” said prices in futures markets “were currently suggesting greater provision of accommodation at coming meetings than they saw as appropriate.”

Further, “it might become necessary for the Committee to seek a better alignment of market expectations regarding the policy rate path with policymakers’ own expectations for that path,” the minutes said. My bet is that markets aren’t ready for such a statement and, further, that the Fed probably won’t make it. Every Fed chairman is baptized in the warm waters of FedSpeak: try to guide markets, but never ever give away what you are actually going to do.

History has been on the side of the fed futures, and it shouldn’t really be a surprise to anyone who knows how markets work. The Fed futures trading represents the sum total of knowledge of many investors around the world. Collectively they “know” more than the savants, however eminent, that are members of the Fed or the FOMC.

An October rate cut seems likely but investors could be disappointed by a Fed that doesn’t give any more sign of accommodation. If some definitive end to easing were broached, I suspect it would be a painful day on Oct. 31, when the next FOMC meeting ends. The caveat to that is if a U.S.-China trade deal is struck by then.

The NY Fed continued to add tens of billions to the financial system through repo operations and 14-day loans. For more on this see last week’s newsletter.

The U.S. Treasury 10-yr note yield ended Friday around 1.75% versus 1.52% the previous week.

Upcoming: 10/30-31 - FOMC meeting.

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Vito J. Racanelli
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