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Fed Rate Cut Oct. 31 Beginning to Look Like a Done Deal
My reading of the Federal Reserve tea leaves suggests that the U.S. central bank is preparing the way for a 25-basis point rate cut to the Fed funds rate, come the end of the month—or year end at the latest. That would bring it to a target range of 1.50%-1.75%.
While the probability of such a reduction was already somewhat likely, there was some ebb and flow to the market’s certainty of it, to judge by the CME Fed futures trading. This higher chance of a cut is based partly on chatter from Fed officials week to week and also on the economic data.
Both now point strongly to a cut Oct. 31, when the Federal Open Market Committee finishes its next regularly scheduled 2-day meeting. This has been discounted into the market, as the Fed futures—our favorite rate cut predictor—shows investors believe there is an 89% probability of a cut. That’s up from less than 70% one week prior.
Let’s start with the dovish talk. Early in the week it seemed the groundwork was prepared for another cut. In remarks for a speech in London, Federal Reserve Bank of St. Louis President James Bullard said one of the biggest risks the economy faces is that overall activity may slow more than most now expect. This FOMC voting member continues to be a strong proponent of lowering rates. He essentially warned of too low inflation and the risk of a slowdown.
The latter is partly based on data that continues to show a soft U.S. economy currently, though in these pages I have pointed out previously that the U.S. should bounce back next year.
Industrial signs are weakening. September U.S. manufacturing output, the biggest component of industrial production, fell 0.5% from a month earlier, the Fed said Thursday. Likewise, retail sales decreased a seasonally adjusted 0.3% last month, compared to expectations of an increase.
The NY Fed continues to add tens of billions weekly to the financial system temporarily through repo operations and 14-day term loans. Last Wednesday, the Fed added the purchase of large amounts of Treasury bills, up to $60 billion monthly. The Fed says this isn’t Quantitative Easing but an effort to help expand the size of its balance sheet as part of a longer-term solution for money-market volatility.
Meanwhile, foreign holdings of U.S. Treasury debt jumped in August to a record $6.86 trillion of U.S. government debt, a 3.4% increase from the month before, according to recent Treasury Dept. data, disclosed Wednesday. Foreign holdings had their largest percentage increase in more than nine years.
The U.S. Treasury 10-yr note yield was unchanged on the week, ending Friday around 1.75%.
Upcoming: 10/30-31 - FOMC meeting.
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