As we noted in yesterday’s Fed Preview, there wasn’t much changed from the November statement, other than to say that the Fed was leaving rates unchanged this month at 1.50% to 1.75%. Last month was the final cut in the mid cycle adjustment, and as promised, Fed Chairman Powell and the Committee left rates on hold. However, this time the decision was unanimous. In addition, the Fed sees no change in rates through 2020 according the Fed’s dot plot forecast. As of the time of this writing, according to the CME FedWatch Tool, the market is pricing in a 93% chance of the Fed leaving rates unchanged at the January 29th meeting.
Source: City Index
But there were some fireworks in the press conference Q&A afterwards. When asked about year-end funding in the repo markets, Jerome Powell said that the Fed was open to purchasing coupons, not just Treasury bills. As a result, the US Dollar began falling, and bonds and stocks went bid. The reason for these moves is that, as the market has been suspecting, this is more “Not QE”. (Remember “Not QE” is a term Powell used as the Fed was providing liquidity to overnight repo markets, which is essentially QE)
Source: Tradingview, City Index
Although there was little fanfare in the FOMC statement itself, the Q&A was much more interesting. It will be important to watch over the next few weeks how the Fed responds to the possibility of a liquidity crunch into the end of the year. The main question will be: Does the Fed have to provide more “Not QE” into year end?
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.