Instant View: July FOMC minutes – 25 basis points cut seen as a mid-cycle adjustment

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Instant View: July FOMC minutes – 25 basis points cut seen as a mid-cycle adjustment

(Reuters) – The Federal Reserve debated cutting interest rates more aggressively at its July meeting, although central bankers were united in wanting to avoid the appearance of being on a path to more rate cuts, minutes showed.

The U.S. central bank cut rates by 25 basis points at the close of the meeting, with records published on Wednesday showing broad concern among policymakers over a global economic slowdown, trade tensions and sluggish inflation.

Story:

KEY POINTS:

* A couple Fed policymakers would have preferred a 50 bp rate cut in July to address low inflation

* Most policymakers viewed a 25 bp cut as part of a recalibration of policy stance, or mid-cycle adjustment, in response to recent changes in economic outlook

* Several policymakers favored maintaining the same target range at July meeting

* Policymakers generally favored an approach that avoided any appearance of the Fed being on a preset course

MARKET REACTION:

STOCKS: S&P 500 .SPX hold gains, last up 0.85%

BONDS: U.S. Treasury 2-year note yield US2YT=RR rises to 1.5610%; 10s US10YT=RR rise to 1.5740%

FOREX: The U.S. dollar index .DXY little changed, up 0.03%

COMMENTS:

BRENDAN MCKENNA, CURRENCY STRATEGIST, WELLS FARGO SECURITIES, NEW YORK:

“It looks like a lot of the Fed officials viewed the July cut as a mid-cycle adjustment and not the start of a long-term monetary easing cycle. The 50-basis point cut was discussed, but it doesn’t look like it was ever a rational possibility. This is definitely supportive of the dollar.

“But I definitely think the Fed’s reaction function is changing so they would be reacting to market developments more than they probably would have in the past. Whenever you see an inversion, or equity markets selling off, or trade tensions escalating, those are things they react to more than economic data.”

CHUCK CARLSON, CHIEF EXECUTIVE OFFICER, HORIZON INVESTMENT SERVICES, HAMMOND, INDIANA

“If the trade war were solved tomorrow I’m not sure the Fed would cut rates anymore. Trade was a major factor in why they cut interest rates and will continue to do so until they have more visibility on that front.”

“ They said this was not the beginning of a preset course. I think that’s true but if the tariff and trade war is going to continue to force their hand, they are on a preset course. They’re fearful that that’s the one thing that can stagnate the economy.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“It appears to me that the Fed might be hinting to the 25-basis point cut in September. There was a few who expressed falling capital ratios, I thought that was a bit of a surprise. There’s a lot of concerns out there. It appears this Fed minutes are more dovish.”

MARY ANN HURLEY, VICE PRESIDENT IN FIXED INCOME TRADING, D.A. DAVIDSON, SEATTLE

“I think the thing that surprised me was how divided they were. I thought there would be a little bit more consensus, although that’s probably a sign of the times that we’re in. We’re really in uncharted territory. They are really concerned about doing or not doing the right thing…they’re really concerned because they perceive rates as being low, but then we’re facing all these headwinds and they’re not quite sure how to deal with it.”

“It’s really old news, this is from the July meeting and what Powell has to say on Friday is going to be much, much more important than these minutes.”

STEPHEN MASSOCCA, SENIOR VICE PRESIDENT, WEDBUSH SECURITIES, SAN FRANCISCO

“The thesis that I like is you look at the rest of the world and we are an outlier. My view is the inversion that happened that everyone’s hair was on fire about was just simply a reaction to the rest of the world. This is not some kind of harbinger of recession, this is the simple fact that I can get the same rate of return in Greece and South Korea than I can get in the United States – where are you going? This is us catching up with the rest of the world, this is just the implication that it is a global economy. It is a zero interest rate policy in Europe and Japan and that is clearly going to have an effect in America regardless of what the economy is doing.

“The market is coming to the realization that this inversion really isn’t an inversion, it is money pouring into our sovereign debt because compared to everywhere else in the world, this is a bargain and it probably continues. And in some way that has to impact the Fed and in some way they can’t continue to be this massive outlier relative to everyone else. The latest inflation numbers haven’t been great but they haven’t been terrible, so maybe they are looking at that and maybe they are concerned that if they continue to get any more aggressive they are going to stoke some inflation, but boy, that is hard to see in this day and age given all the secular pressure on pricing. When you add it all up there really is no inflation and the Fed has running room here but I don’t see how rates move back up. The line of least resistance is going to be for rates to go down, that is going to be good for the economy, it is going to be good for stocks and I am still bullish.”

COLLIN MARTIN, FIXED INCOME STRATEGIST, SCHWAB CENTER FOR FINANCIAL RESEARCH, NEW YORK

“The minutes are old news after the (Trump’s) tariffs announcement. The door is open for more cuts down the road. I think Powell’s speech later this week is going to much more important than the minutes. It’s interesting to see whether Powell still characterizes whether they are still looking at midcycle adjustments or a series of rate cuts. The biggest risk is still trade uncertainty. This should lead them down to a dovish route. With a sharp drop in yields, the domestic economy is still doing relatively okay. Their views may have changed a day later after tariffs were announced. The market is going to be pretty quiet before Powell’s speech at Jackson Hole.”

MICHAEL POND, HEAD OF GLOBAL INFLATION-LINKED RESEARCH, BARCLAYS, NEW YORK

“(The minutes) were fairly balanced. There were some participants calling for 50 basis points and some arguing for no change, so the 25 basis point (cut) that was implemented was a compromise between the two. What will be particularly interesting as we head into Jackson Hole meetings will be the update from Fed Chair Powell. There has been a significant amount of news, market events and data since this FOMC meeting. Trade war rhetoric has heated up significantly, volatility has increased, but on the other side, we have got a bit of strength in data both on inflation as well as retail sales.”

“This doesn’t change our view of where things are headed because it was quite balanced between those arguing for more and those arguing for less. And there has been a significant amount of development since the meeting.”

“The market doesn’t seem to have moved too much on these minutes, and that seems about right.”

WILLIE DELWICHE, INVESTMENT STRATEGIST, BAIRD, MILWAUKEE

“The Fed clearly wants to be flexible. They are clearly worried about some of the global tensions that are out there, whether it is trade or Brexit or some of those international developments.”

“But they do see it as something of a mid-cycle adjustment, so not the beginning of a new and sustained easing cycle, but just adjusting to the world as they are seeing it and the risks that they are seeing right now.”

“The stocks still want to see any evidence that the Fed is going to cut rates. That’s what stocks are banking on. I don’t think there’s anything in here that would be an ‘aha!’ warning sign to stocks that they’re not going to get another rate cut. But I also think that longer-term picture of where the market sees rates ending up and where the Fed sees rates ending up might be different right now, and that’s going to have to get resolved at some point.”

Source: https://www.reuters.com/article/us-usa-fed-instant-view/instant-view-july-fomc-minutes-25-basis-points-cut-seen-as-a-mid-cycle-adjustment-idUSKCN1VB28S