The US Federal Reserve is expected to see a second consecutive rate cut in the still technically significant mid-cycle Powell adjustment. The big question for market participants is whether the Fed will make further cuts. The bond market is still crying for further cuts, with 10-year government bond yields still well below the Fed funds target.
– Optimism for Powell grows to achieve a moderate cut.
– Will it be an Advanced Midcycle Cycle or a Relaxation Cycle?
– The Fed's repo movement signals that more easing instruments are on the way
is starting to show that manufacturing is declining and declining trust requires a much more accommodating attitude. The Fed also needs to engage with like-minded people and decide whether to break a global wave of easing attempts to fight a global slowdown and fend off deflationary pressure. The unwillingness to sustain a steady stream of interest rate cuts and openness to QE could push up the dollar on a broad front. If Powell highlights the downside risks to the economy and achieves a modest slowdown, the punchbowl argument could help US equities reach their recent record highs. It is likely that further measures need to be taken to avert geopolitical risks such as trade wars, Persian Gulf tensions and even Brexit. Repo Madness The Federal Reserve Bank of New York was forced to take action Tuesday after risks increased that policy rates would exceed the Fed's upper end of the central banks' target of 2.25%. The New York Fed bought $ 53.2 billion worth of securities as part of a repo transaction. The sudden rise in the overnight rate on repo transactions meant that there was not enough cash to get out of the money markets and interest rates rose more than 8%. This problem shows that the mechanism for setting the rates has some weakness. This should strengthen the Fed's stance to lower the IOER rate tomorrow. The Fed loses control of dictating interest rates, and if collateral remains overcrowded, the Fed may be forced to introduce a new instrument aimed at offsetting collateral and reserves. The other way to fix this problem would be to cut interest rates enough to tilt the US yield curve.
This Fed meeting could be a turning point in the emergence of pigeons. The downside risks could justify some members undertaking to make some further cuts by 25 basis points, with a majority advocating at least one more cut by the end of the year. The Hawk members of the committee have expressed their concerns, which may mean that they are ready to join the pigeons. They could justify a few more interest rate cuts to reduce the inversion pressure on the yield curve. However, if this is okay and the economy firmer, they could return to streamlining.
EUR / USD May Drop to New Lows in 201
Many investors expect the Fed to make a massive dollar move. If Powell and the company disappoint the rising, moderate expectations that the market has priced in, we could see the euro fall back to the lows of 1.09 that came after the ECB announced its plans for more QE , A moderate rate cut, bolstering further interest rate cuts and possibly QE, could help move the EUR / USD towards 1.1200.
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