Fed On Hold

As widely expected, the Fed decided to lower the target fed funds range by 25 basis points (bps) to 1.50-1.75% on October 30, including a 25-bps reduction in the interest on excess reserves (IOER) rate. However, the official statement and Fed Chair Jerome Powell’s messaging following the meeting suggested a pause in interest rate policy barring a significant change in the data trend (good or bad). While financial markets remain very sensitive to U.S./China trade talks and geopolitical events, interest rates are more likely to trade in a tighter range (less volatile) with the Fed presumably on the sidelines for the time being. Trade headlines have generally been less negative over the last month, and it appears that a no-deal Brexit is a lesser probability for the remainder of 2019. The presidential impeachment inquiry could potentially inject some volatility into markets, but it hasn’t been a factor to this point.

October At-A-Glance

• The Fed announced another rate cut in October, but forward guidance suggests that monetary policy is on hold for now.
• Trade headlines have been less negative, and the U.S. economy appears to be in better shape than some feared.
• The Fed is increasing the supply of reserves to combat stress in short-term funding markets, but some contend that there’s more to do on the regulatory front.

Recent economic data has surpassed expectations, particularly the October employment report and Q3 GDP. Regarding the former, job growth was better than expected in the month, and the prior two months were revised higher by a total of 95,000 jobs. Nonfarm payrolls added 128,000 jobs in October (85,000 expected). This may not seem all that impressive, but when considering the effects of the General Motors strike and temporary census workers, six-figure job growth is more encouraging. The first estimate of Q3 GDP growth suggests that the U.S. economy expanded at a 1.9% annualized pace over the quarter, 30 bps above expectations, and just 10 bps slower than the 2% Q2 growth rate. That’s despite both greater uncertainty surrounding trade and slowing global growth rate. Once again, consumer spending paved the way (personal consumption +2.9%), more than offsetting the effects of a second consecutive quarterly decline in business capital expenditures.

This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.