Fed cuts with 3 dissents and funding challenges


FOMC’s 25bps policy rate cut with little concern about the outlook left the market dissatisfied.
Taimur Baig19 Sep 2019
  • Steps to improve repo operations could be followed by resumption of asset purchases
  • Considerable tension in Fed decision-making is apparent
  • FOMC chair Powell may find it hard to build the case for another cut this year
Federal Reserve Board Chairman Jerome Powel Photo credit: AFP Photo


A rate cut with little concern about the outlook left the market dissatisfied.
Steps to improve repo operations could be followed by resumption of asset purchases.
Considerable tension in Fed decision-making is apparent.
Short of a major re-escalation in trade war, Chair Powell may find it hard to build the case for another cut this year.

A neutral cut?
A highly-expected policy rate cut delivered with little enthusiasm or conviction; that’s the way we will characterise today’s FOMC’s decision. In addition to cutting the Fed funds target rate by 25bps to 1.75-2.00%, the FOMC implemented a few liquidity measures: interest rate paid on required and excess reserve (IOER) balances was eased to 1.80%; interest rate paid on required and excess reserve balances were also set at 20bps below the top of the target range for the federal funds rate. The combined impact of the policy rate cut and the change in IOER formula led to an effective cut of 30bps for reverse repo operations. The aim of these measures is to increase trading in the federal funds market at rates well within the FOMC's target range, something that not been the case lately, necessitating open market operations.

FOMC members are finding it hard to find consensus. Today’s decision was characterised by 3 dissents, with James Bullard voting for a 50bps cut and Esther George and Eric Rosengren voting for a pause. Given such diverging views, it is not surprising that the median dot plot signals no further cuts in 2019.

Chair Powell came across as very neutral in the press conference, which was a source of disappointment for the market doves, perhaps explaining why asset markets took little away from the meeting’s outcome. Mr. Powell’s reluctance to confirm that the Fed continues to have an easing bias was another likely source of disappointment for the market.

Given the ongoing pressure on funding rates and sizeable open market operations carried out by the New York Fed this week, attention is shifting to the effectiveness of the Fed’s monetary operations. We think that the Fed may well be heading toward resuming treasury purchases to maintain a stable balance of excess reserves. Chair Powell however stressed that recent money market tightness did not have macroeconomic significance.

FOMC members are still by and large optimistic about the outlook. The risks that led to policy easing are considered to be largely external; indeed, Chair Powell attributed weakness in exports and investment to trade war, and did not find anything to worry about as far as jobs growth was concerned.



Looking at the latest dataflow on wages, labour costs, jobs, core inflation, industrial production, and currencies, we frankly find little to justify today’s rate cut. We also don’t see the market’s expectation of another cut this year as highly plausible, given the tension among the FOMC’s voting members. Unless US-China relationships nose dive in the coming months, or the US economy shows some sudden loss of momentum, the Fed will remain on the sideline this year, in our view, regardless of President Trump’s highly antagonistic tweets.






To read the full report, click here to Download the PDF.


Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
taimurbaig@dbs.com



The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.