The Federal Reserve Board cut interest rates again yesterday, lowering its Federal funds target rate range to 1.75-2.00 percent, its second cut in a month and a half. The Fed's previous cut on July 31 was the first reduction in over 10 years. (See our Aug. 1 News, "Fed Cuts Rates Quarter to 2.0-2.25 Percent; FP on USAA, Schwab Deal.") Money fund yields, which jumped Tuesday on the mysterious spike in repo rates, are expected to fall in coming days and to pass through the 25 basis point decline over the next month. We review the Fed move, the repo anomaly, and a couple other recent articles, below.
The Fed's release, entitled, "Federal Reserve issues FOMC statement," says, "Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed."
It continues, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective."
The Fed adds, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
The statement also says, "Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent."
The Federal Reserve Bank of New York also issued a statement yesterday, in reaction to the mysterious spike in rates on repurchase agreements, or "repo", on Monday. Their "Statement Regarding Repurchase Operation" tells us, "In accordance with the FOMC Directive issued September 18, 2019, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct an overnight repurchase agreement (repo) operation from 8:15 AM ET to 8:30 AM ET tomorrow, Thursday, September 19, 2019, in order to help maintain the federal funds rate within the target range of 1-3/4 to 2 percent."
It adds, "This repo operation will be conducted with Primary Dealers for up to an aggregate amount of $75 billion. Securities eligible as collateral in the repo include Treasury, agency debt, and agency mortgage-backed securities. Primary Dealers will be permitted to submit up to two propositions per security type. There will be a limit of $10 billion per proposition submitted in this operation. Propositions will be awarded based on their attractiveness relative to a benchmark rate for each collateral type, and are subject to a minimum bid rate of 1.80 percent."
While we're as baffled as everyone over why repo rates would skyrocket on a mere $30 billion money fund outflows (caused by corporate tax payments and a Treasury auction settlement), we were surprised to see the spike's impact on money fund yields. Our Crane 100 Money Fund Index, which fell below 2.0% over a month ago and which stood at 1.93% on Monday (9/16), jumped 12 bps to 2.05%. One-day yields for some funds surged to over 4.0%, so yields could even rise in coming days as the repo super-spike works its way through. Of course, yields should then move lower, but stay tuned. (See also, Bloomberg's "Repo Market Panic" story.)
In other news, the Wall Street Journal wrote yesterday that the, "Fed Cut Threatens Online Account Growth." They explain, "Banks face risk higher-interest savings offerings will lose appeal as rates fall. Big banks bet that online savings accounts would help them bring in customers when rates were rising. Now that rates are falling, that growth may stall."
The piece continues, "Many banks started offering these accounts -- which often paid interest rates of at least 2% -- in the past couple of years to attract depositors. But some of these lenders, including PNC Financial Services Group Inc., Citizens Financial Group Inc. and CIT Group Inc., have recently started trimming their deposit rates."
It tells us, "Banks have broad latitude over what they pay on deposits, though they tend to move interest up and down as the Federal Reserve adjusts rates. Banks often are quicker to cut deposit rates than they are to raise them. Banks including Goldman Sachs Group Inc. and Ally Financial Inc. recently cut their deposit rates even before the Fed did."
Finally, the article adds, "Banks tweak interest rates to balance two different needs: They want to attract and retain customer deposits, but they don't want to pay more than customers demand. Banks make money on the difference between what they charge on loans and what they pay on deposits." It quotes PNC's CEO Bill Demchak from the company's July earnings call, "If you post in the top couple rates, you gather lots of deposits.... If you're off that frontier it slows you down."
