"Never Make Predictions, Especially About the Future" - Casey Stengel


This sage advice from Casey Stengel, right fielder and eventual manager of both the Yankees and the Mets, should resonate with those watching both the World Series and the FOMC press conference.

As expected, the FOMC cut its target range for the federal funds rate by 25 basis points (bps) following its regularly-scheduled monetary policy meeting. . The rationale by the Committee for the cut were the same as when it cut at its July meeting, citing "...implications of [negative] global developments for the economic outlook as well as muted inflation pressures."

Given this cut was widely expected, the market was especially interested the Committee's comments regarding future rate moves. From this perspective, the statement had no new information, saying only, "The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate." In other words, the FOMC was very non-committal, being neither hawkish nor dovish in their prepared statement.

On balance, this was a positive for markets, given there seemed to be some fear this would be a "hawkish cut" by the FOMC. Prior to the meeting, the market had been pricing in at least one more cut in 2020, with about a 30% chance of two cuts. Given the market was little changed from pre-meeting levels, it appeared everyone was waiting to see what Chairman Powell had to say during the FOMC press conference following the conclusion of the meeting.

FOMC press conference

Chairman Powell's comments were overall mixed. In some ways, he sounded a bit more hawkish than the Committee's official statement when he described the cut as "insurance", going on to say the current monetary policy stance is likely to remain appropriate for some time, and that it would take a "material reassessment" of the central bank's outlook for the economy for additional cuts to occur. However, Powell also expressed some concern about the challenges the FOMC faces getting inflation to their 2% target, saying "We're in the middle of thinking about ways of making that 2% inflation objective more credible."

Although Powell was very careful to avoid saying anything that commits the FOMC to hike or not hike in the future, his initially hawkish bias, combined with his concern about inflation, would have made Casey Stengel beam with pride. Toward the beginning of Powell's press conference, shorter-tenor yields were higher, reflecting a lower likelihood of future cuts; while longer-tenor yields were lower, reflecting lower expected inflation. By the time Powell was done speaking, shorter-tenor yields had reversed, pricing in a slightly higher likelihood of future cuts. Overall, the 2-10 curve is about 2-3 bps flatter, with 10-30s flattening about 1-2 bps.

I'm sure the market will be wrestling with the lack of continuity between Powell's comments in the coming days. Nevertheless, based on June's SEP dot-plot, we continue to believe the Committee lacks clear consensus on the future path for rates. As a result, the Fed is likely to cut if and when the market expects it to do so. We still believe many of the headwinds responsible for the slowing economy are likely to persist, and the Committee will likely need to cut a couple more times in 2020.


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Calvin Norris, CFA

About Calvin Norris, CFA

Calvin Norris, CFA, is a rates strategist responsible for guiding the firm's interest rate strategy. He is also a portfolio manager responsible for the overall strategy, portfolio management and trading of money market, short-term cash, ultra short duration, government bond and US Treasury Strips portfolios.