Policymakers Pleased With Money Market Stabilization, Looking to Avoid A Repeat

We continue to expect a third rate cut this year, likely at the December FOMC meeting. Last week came the announcement that House Democrats would begin impeachment proceedings against President Trump. At this point, we don’t see that announcement as significantly affecting the prospects for monetary policy. Equity markets seem to have taken the news in stride, dipping after the announcement but then stabilizing at high levels. The New York Fed’s operations following a surge in short-term rates seem to have been largely successful in stabilizing money markets. The overnight general collateral repo rate did spike earlier today,  reflecting quarter-end pressure, but it later subsided after a New York Fed repo operation. Remarks from  FOMC participants suggest that while they are pleased with how the New York Fed’s actions have stabilized markets, they want to avoid a repeat of such incidents and, as such, considering balance sheet policies such as a standing overnight repo facility and balance sheet growth through asset purchases will be a focus for policymakers in the months ahead. 

Policymaker Remarks 

Policymakers generally supported the Fed’s decision to cut rates in July and September and continued to have confidence in the economic outlook, in part because of those adjustments to policy. Daly (9/23) said the economy is “in a good place and that a “very strong” labor market “is slowly and gradually pushing inflation up to our 2% target,” though that part of the mandate hasn’t quite been achieved. In her view, “Changing the policy path from December to where we are now is part of why you see the economy, in my judgment,  continuing to grow above trend.” Brainard (9/25) likewise said that the economy is strong but that trade policy uncertainty has “a material negative impact on the health of the economy. She said, “We’re watching  that very closely, and in my own view it poses downside risks and that’s why it made sense to soften the  path of monetary policy.” Kaplan (9/26), like his colleagues, expected “solid” growth but had concerns about relying on monetary policy to lift growth. He said, “The marginal return in lowering the fed funds here has  got diminishing returns.” He had previously stated that he wasn’t projecting another rate cut this year. 

Several policymakers expressed the view that the FOMC should be in a wait-and-see posture concerning further easing. Barkin (9/26) called his stance toward policy right now “balanced.” He said that the Fed’s  recent easing “doesn’t mean a recession is imminent, nor that we are in a prolonged period of easing.” Harker  (9/27) said that “We should be on hold concerning rates and see how these headwinds resolve  themselves.” Evans (9/25) revealed that the dots he submitted for the September FOMC meeting assumed a  total of only two cuts this year, putting him with the median. He said that “A couple of rate cuts seemed  useful” and that the Fed is now “well-positioned.” But he said that he is “open-minded to additional action if  the data comes in that way and that is how the discussion goes.” Speaking several days later (9/30), he  seemed to perhaps express even less conviction in his projection of two cuts, saying, “What we’ve done  already might be sufficient, but I’m open-minded to suggestions that we might need more.” 

Kashkari (9/27) reiterated his argument for easier policy than the FOMC has provided: “I argued for steeper  interest rate cuts just because I see no evidence that the U.S. economy is running at capacity or beyond  capacity.” Bullard (9/23), who dissented at the last FOMC meeting because he wanted more accommodation,  said “The FOMC may choose to provide additional accommodation going forward, but decisions will be made  

on a meeting-by-meeting basis.” He said that, “instead of creeping down slowly I would prefer to get to where we need to be,” noting that the FOMC could reverse any cuts if the risks motivating the “insurance cuts” were not ultimately realized. 

Policymakers continued to discuss the recent surge in money market rates, including the measures taken as an immediate response and the implications for future policy. New York Fed President Williams (9/27)  reiterated his explanation of the surge in rates, which was that “Despite there being a lot of reserves in the system, they weren’t moving around. They’re lumpy.” The solution is to have sufficient reserves: “We are  seeing that liquidity doesn’t move around as easily, in these situations, which means that if we want interest  rates to stay kind of on their own in a narrow range, that we have to make sure we have that amount of  reserves to support that.” The New York Fed has been adding reserves on an ad hoc basis through repo operations, first on an overnight basis and more recently also through term operations. He said there is a  possibility that the Fed will instate a standing repo facility, which the minutes have indicated staff and FOMC  participants have been looking into. A consensus seems to be forming that this was not a one-off event affecting money markets and that the FOMC should act to ensure reserves remain sufficient to avoid such episodes. For example, Evans (9/30) said, “The most important thing is providing ample reserves.” He called  the New York Fed’s recent actions a “well-designed plan” and said that “Term repos have been extremely  helpful.” Evans (9/25) had previously said, “it could be the case that a flat out larger balance sheet may  correct that [the possibility of further surges in money market rates].” Harker (9/27) said, “It is very possible  that reserves are near, or approaching, their appropriate level,” in which case the FOMC “may need to resume  the organic growth of the balance sheet earlier than anticipated.” Bullard (9/23) supported a standing repo  facility, saying, “I think the repo facility would put a cap on rates in this situation.” He saw such a facility as  having the benefit that “you probably would not have to use it most of the time because its mere existence  would stabilize trading.” 

In a speech last week, Clarida (9/26) reiterated his view that “the range of plausible estimates of u* extends  to 4 percent and below and includes the current unemployment rate of 3.7 percent.” He judged that “U.S.  inflation expectations today do reside in a range I consider consistent with our price stability mandate.” He  provided an update on the Fed’s framework review, explaining that the FOMC had recently discussed two of  its tools, forward guidance, and asset purchases, and felt that it “could proceed more confidently in using  these tools in the future if economic circumstances warranted.” However, the FOMC still “judged that forward  guidance and balance sheet tools, while helpful, did not eliminate the risk of returning to the ELB.” As for the remainder of the review, he said, “I expect we will consider various topics, such as alternative policy strategies, options for enhanced use of existing monetary policy tools, possible additions to the policy toolkit,  potential changes to communication practices, and the relationship between monetary policy and financial stability. We will share our findings with the public when we have completed our review, likely during the  first half of next year.“ 

Nowcasts (2019:Q3)

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.1% 1.9% 1.8%
New York Fed Staff Nowcast 2.1% 2.2% 1.6%
CNBC/Moody’s Survey 2.0% 2.0% 2.0%

Recent Data 

Last week’s incoming data were mixed, but it still appears that U.S. real GDP grew at a solid, trend-like pace in Q3. The Conference Board consumer confidence index declined much more than expected in September,  joining the Michigan survey measure in showing a late-summer dip. It remains at a high level in absolute terms, however. BEA’s third estimate of Q2 real GDP growth was unrevised at 2.0%, but core PCE inflation was marked up from 1.7% to 1.9%. The monthly data underlying those quarterly estimates revealed that 12- 

month core PCE inflation was marked up to 1.7% in July and edged up further, to 1.8%, in August. The monthly data on personal spending was a disappointment, with real consumer spending edging up just a  tenth in August. The core capital goods data were also soft: Core shipments posted a solid gain in August,  but core orders declined two tenths.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
FHFA House Price Index MoM Jul 0.4% 0.3% — 0.2%
Conf. Board Consumer Confidence Sep 125.1 133.0 134.2 135.1
New Home Sales MoM Aug 7.1% 3.8% -8.6% -12.8%
GDP Annualized QoQ 2Q T 2.0% 2.0% — 2.0%
Personal Consumption QoQ 2Q T 4.6% 4.7% — 4.7%
Core PCE QoQ 2Q T 1.9% 1.7% — 1.7%
Advance Goods Trade Balance Aug -$72.8b -$73.4b -$72.5b -$72.3b
Wholesale Inventories MoM Aug P 0.4% 0.1% 0.1% 0.2%
Pending Home Sales MoM Aug 1.6% 1.0% — -2.5%
Personal Income MoM Aug 0.4% 0.4% — 0.1%
Personal Spending MoM Aug 0.1% 0.3% 0.5% 0.6%
PCE Prices MoM Aug 0.0% 0.1% — 0.2%
PCE Prices YoY Aug 1.4% 1.4% — 1.4%
Core PCE Prices MoM Aug 0.1% 0.2% — 0.2%
Core PCE Prices YoY Aug 1.8% 1.8% 1.7% 1.6%
Core Capital Goods Orders MoM Aug P -0.2% 0.0% 0.0% 0.2%
Core Capital Goods Shipments MoM Aug P 0.4% 0.3% — -0.6%
U. of Mich. Sentiment Sep F 93.2 92.1 — 92.0
U. of Mich. 5-10 Yr Inflation Sep F 2.4% — — 2.3%

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