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Shared Fed Cuts Rates, But Disappointments; Stumbles On Market Mechanics



If only James Bullard had his way. The head of the Federal Reserve Bank of St. Louis was the only voting member of the Federal Open Market Committee (FOMC) who wanted to cut the Fed's reference rate by half a point, instead of a quarter point by seven other voters.

In fact, the decisions of the political decision-making panel, usually driven by consensus, will resemble divided decisions in the Supreme Court. Two other eligible voters, Kansas City Fed Chief Esther George and Boston Fed Chief Eric Rosengren, also dissented from the majority vote, but they wanted to keep prices steady at 2.00 to 2.25 percent instead of cutting to 1, 75 to 2.00 percent. They had also dissected in July and voted to keep interest rates stable at 2.25-2.50.

The market participants were not satisfied. They had already priced in the quarter-point cut and wanted at least some indication of where the Fed is heading in the near future.

  Fed Dot Plot, September 18, 2019

Fed Dot Plot, September 18, 2019 [19659006] The most they could glean from the dot-plot graph is that seven FOMC members – out of 17, reach non-participants is included – expect one quarter-point cut this year. Thin slump, as it leaves 10 policy makers who do not expect further cuts.

  Dow 15-minute chart

Dow 15-minute map

Stocks plunged, amounting to 200 points in the wake of the statement. [19659002] Equally disappointing is that none of the FOMC members see prices that fall below the 1.50-1.75 range through next year. After this, the overweight will shift to higher prices.

In Wednesday's vote on the reduction, the board – which everyone gets to vote – fell in line with the chairman's wishes, as they always do, and the New York Fed made Chief John Williams a permanent voter and practically a board member. Fed leader Jerome Powell just got another regional bank president, Charles Evans from Chicago, to join the Washington consensus.

After the decision, Powell answered a question about a Fed bias against relief by saying the Fed no longer has a bias. He added that there were no preset courses and that policy makers have been willing to move to a lower path for the federal fund rate during the year. Neither would hesitate to switch to one if the economy went south, but they don't think it will be necessary.

Coincidentally, the inch markets ran out of money on Monday and the Fed had to inject $ 128 billion into the markets when the FOMC met so it was enough to pay taxes and liquidate bond transactions. That's the kind of thing that shouldn't happen. The last time in 2008 was in the midst of an economic collapse.

The dates of these transactions were well known in advance. Why, a journalist asked Powell, didn't you see this coming. Answer: Well, we saw it coming, it was just stronger than we expected.

Powell brushes it off as a technical issue that does not affect the economy or monetary policy, but it is a type of accident that lends some credence to President Donald Trump's constant harping on the Fed's incompetence.

The New York Fed is responsible for conducting monetary policy and the shortage of federal funds cash grants increases short of their 2.25 percent ceiling. No matter how you look at it, the bank in New York, under its new leader, economist John Williams, dropped the ball in a way it had not done under its predecessor, Goldman Sachs alum William Dudley.

Powell said the Fed may need to resume "organic growth" of the balance sheet to ensure there were sufficient bank reserves to prevent this type of shortfall in the future. He explicitly said that this would not be a quantitative easing, but stocks were mostly lost because investors are looking at a larger Fed balance sheet as accommodating no matter how you qualify it.


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