MNI FED WATCH: Another Insurance Rate Cut; QT To End
The Federal Reserve is expected to lower its benchmark interest rate a quarter point Wednesday for a second straight meeting and signal an end to its quantitative tightening program after more than three years.
Fed Chair Jerome Powell, who called September's resumption of cuts after a year-long hiatus a "risk-management" move, reiterated this month that the outlook for employment and inflation hadn't changed, based on private- and public-sector data unaffected by the federal government shutdown.
Rising downside risks to employment following sharp downward revisions to payrolls data are prompting the FOMC to bring rates closer to neutral, and official projections showed 10 out of 19 policymakers penciling in at least two more cuts for the year.
Markets are nearly locked in on a cut this month and a third in December. (See MNI POLICY: Fed Set To Keep Cutting Rates Despite Missing Data)
ONGOING INFLATION PRESSURES
CPI headline and core inflation at 3.0% in September were a bit milder than Wall Street had anticipated but remain elevated relative to the Fed's 2% goal. (See MNI INTERVIEW: Fed Right To Remain Cautious On Rate Cuts-Kohn)
With trend inflation gauges suggesting sustained upward pressure and businesses still planning to pass on cost increases, Powell is likely to be noncommittal on a December cut for now. (See MNI POLICY: Lingering Inflation Unease Tempers Fed Easing Push)
Governor Chris Waller, who has argued from the start that tariffs won't have a lasting impact on inflation, also warned this month that stronger-than-expected growth could indicate that policy is less restrictive than thought and cuts need to be slower than earlier expected. (See MNI INTERVIEW: ISM Services Chair Sees Depressed Growth Ahead)
QT2 Ends
Money market strains in recent weeks may force the Fed to bring its Covid-era QT program to an end as soon as this meeting and to begin asset purchases to keep pace with demand for currency and other liabilities not long after.
Key short-term borrowing rates spiked this month and banks tapped the Fed’s standing repo backstop. Policymakers are keen to avoid a repeat of the repo crisis of 2019 during the first QT effort.
The Fed has said it will stop QT when reserves are "somewhat above ample," and Powell hinted last week “we may approach that point in coming months." (See MNI INTERVIEW: Fed Soon To End QT On Funding Strains - Wright)
The balance sheet has shrunk by about USD2 trillion since 2022, leaving reserves at about USD2.9 trillion, just above Waller's estimate of "roughly ample reserves" at USD2.7 trillion or 9% of GDP.
