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DiMeo Schneider & Associates

Investment Manager Research

In Focus: No Spooking the Markets

October 31, 2019

This week Federal Open Market Committee (FOMC) participants lowered the target federal funds range 25 basis points to 1.50 – 1.75 percent in response to continued weakness in business investment activity, sluggish global growth and trade tensions. That said, the Committee still expects the U.S. economy to grow near 2.0 percent, reflecting strong trends in household spending and more accommodative financial conditions. Fed officials reiterated expectations for their preferred inflation measure, personal consumption expenditure price index (PCE), to rise to 2.0 percent, but did not provide an expected time horizon for achieving that forecast.

In addition to lowering the federal funds rate, Fed officials provided an update on open market operations. These actions are designed to augment ongoing balance sheet management policy and to mitigate risks associated with repo market funding pressures while ensuring that the level of reserves in the financial sector remains ample. To achieve these goals, the Fed is taking several steps, which include buying U.S. Treasury bills through June 2020. Additionally, the Fed will conduct overnight and term repo operations through January 2020 to help certain banks meet overnight liquidity regulations under Basel III. The Fed will also conduct overnight reverse repo operations to provide liquidity to other banks.

In aggregate, these policies are growing the Fed’s balance sheet. Since repo-funding stress emerged in mid-September, the balance sheet grew just over $200 billion, or 5.3 percent. Despite deploying quantitative measures to support financial conditions, Fed officials insist these actions do not constitute as quantitative easing…

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