As many expected, the FOMC voted 10-2 to cut rates for the second consecutive meeting to a target range of 3.75-4.00%. What markets were not expecting was a hawkish tone from Jerome Powell about a December rate cut when he commented, “A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.” Prior, interest rate futures showed a 90%+ probability for a December cut, but as of this writing that probability is down to 65%. The two dissents were Stephen Miran who favored a 50 basis point cut and Kansas City Fed President who favored no cut at all. Regarding the dissents, Powell added, “For some part of the committee, it’s time to maybe take a step back and see whether there really are downside risks to the labor market or see whether, in fact, the strong growth that we are seeing is real.” Powell also noted the lack of data from the government shutdown may cause policymakers to proceed more cautiously, noting: “If you’re driving in the fog, you slow down.”
Powell added that the Fed would stop shrinking its portfolio of assets beginning December 1, ending the quantitative tightening process that began in 2022. The Fed plans to stop unwinding its Treasury holdings at the current pace of $5 billion per month. It will continue to runoff its MBS portfolio by $35 billion per month, reinvesting those proceeds into short-term Treasuries to maintain the current balance sheet size while reducing the portfolio’s duration. Powell cited recent tightening in money market liquidity conditions as a sign it was time to end the 3-year tightening program to ensure ample macro-level liquidity.
Equity markets continue to waft in euphoria as all three major equity indices hit new all-time highs leading up to the Fed meeting, only to fall after Powell’s hawkish tone regarding a December rate cut. The same sentiment had bond yields surging 10-12 bps after the meeting, sending the 10-yr note back over 4%. Gold’s rally also fell this week as traders locked in price gains, briefly falling below $4,000 per ounce. The lack of government data is shielding markets from bad information so all they’re left to run on is corporate earnings reports and news headlines.
Pressures continue to build in money market accounts with overnight rates on SOFR, IORB and TPGCR rising as the Fed meeting approached. This is a sign of volatility from a lack of liquidity. Mark Cabana head of U.S. interest rate strategy at Bank of America, commented, “The Fed may have chosen to do little on liquidity adding operations because they see the sources of funding pressure as temporary. We think this is unlikely. Funding pressures are likely to persist and grow as QT continues.”
KEY INDICATORS THIS WEEK
Case-Shiller Home Price Index – Fell 0.4% in August while home prices fell 1.5% year-over-year.
Next Week – It's supposed to be jobs weeks, but we’ll see what we get.