The second reduction of interest rates since the beginning of the year proceeded as was widely expected.
The Federal Open Market Committee (FOMC) opted for the classic rate cut of 25 basis points, taking the key policy rate to a range of 3.75%-4%. Economists polled by Reuters had almost unanimously predicted that outcome from the Federal Reserve’s two-day meeting, and markets were discounting the cut by nearly 100 percent.
The decision was opposed by Stephen Miran, who advocated a 50 basis point rate cut, and Jeffrey Schmidt, who favored keeping rates unchanged.
The end of quantitative easing
In addition to the interest rate move, the central bank announced that it will end its quantitative tightening program on December 1. The decision was awaited by money markets as there were strong signs of liquidity pressure while bank reserve levels are falling. Fed Chairman Jerome Powell himself had set the stage as he devoted his latest highly technical speech to the issue, signaling for the first time that the process could be completed in the coming months.
Instead of allowing up to $5 billion in bonds to expire each month and not be replaced, the central bank will now seek to keep its stock of government bonds stable from Dec. 1 by rolling over maturing bonds.
The Fed also said it is maintaining its current plan to allow up to $35 billion in mortgage-backed securities to expire each month — a target it has never met in more than three years of tapering — but starting Dec. 1 will reinvest all proceeds from the maturity of MBS into interest-bearing Treasuries.
No financial data
The de-escalation of borrowing costs was decided even though the Fed has virtually ignored economic data lately.
Aside from last week’s release of the Consumer Price Index, the government has suspended all data collection and reporting due to the shutdown, meaning key metrics like nonfarm payrolls, retail sales and a host of other macroeconomic data are unavailable.
In its post-meeting statement, the FOMC acknowledged the uncertainty that comes with the lack of data, clarifying how it categorized general economic conditions. “Available indicators suggest that economic activity is expanding at a moderate pace. Job growth has slowed this year and the unemployment rate has risen, but remained low through August. The latest indicators are consistent with these developments,” the statement said. “Inflation has moved upward since the beginning of the year and remains somewhat elevated.”
Each of these designations represented modifications from the September statement. The most significant change was the view of broad economic activity. In September, the FOMC said activity had moderated. The statement echoed policymakers’ concerns about the labor market, saying “risks to employment have increased in recent months.”
The reaction of the markets
U.S. bond yields continued their rise after the Fed cut interest rates and announced it would restart limited purchases of U.S. Treasury securities.
The yield on the benchmark 10-year note rose 3.5 basis points to 4.018%, while the yield on the two-year note, which reflects interest rate expectations, rose 3 basis points to 3.524.
Stocks held on to their gains. The Bloomberg Dollar Index was little changed.
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