Chairman Powell was consistent with his previous statements. He confirmed he is confident regarding the evolution of the repo market and mentioned the positive effect of the Fed intervention. However, he added that “standing repo facility is something that will take time to evaluate”.
He indicated that the market has been functioning well in the last couple months and that current pressures are manageable.
This view is not shared by all market participants that see rising costs, with repo rates now at almost 4%, as a warning signal indicating that the monetary transmission mechanism is broken.
Some market participants also expect that difficulties will increase in year-end, which is not “unusual” at this period of the year, as acknowledged by Powell. He clearly let the door open, at least in the short-term, to more purchase of securities if necessary.
Tonight’s meeting does not change our view on the Fed. We think that the Fed is still too optimistic about the outlook. We see that the likelihood of a rate cut during H1 2020 remains high as US growth momentum is weaker than a year ago and downside risks are still elevated (trade war, China’s slowdown, funding issues etc.). We expect that the US manufacturing sector will stay weak in coming months, which could force the Fed to reassess the balance of risks.
On the top of that, funding issues in the repo market are still cause for concern. The Fed has already injected $350bn, but total market support is likely to exceed $500bn in coming months. We are much more worried about what is happening and what it signals regarding monetary policy transmission than the Fed. We will know more about the extent of the problem tomorrow, as the Fed is expected to announce its 2020 calendar offerings. We have little doubt that “not QE” is likely to last longer than most FOMC members expect.