Lately, the Fed has re-started the use of repos, forced by combination of (their own) overly tight banking rules, large Treasury auctions (due to big federal deficits), and the inverted yield curve, which create periodic issues for banks seeking overnight funds.
The Feds could address these issues in three ways. First, it could loosen bank rules, some of which are designed for crisis situations, and reports from a couple of weeks ago suggest bank supervisors are giving banks more flexibility to use Treasury securities instead of reserves, which should help in that regard. Second, the Fed could let banks pay higher borrowing costs and let natural market forces make banks adjust naturally. Or third, the Fed could permanently add reserves to the system which would mean it simply doesn’t want eased regulations or free markets to work.
The last path, which we think is unneeded, is what the Fed announced a few weeks ago when it decided to starts increasing the size of its balance sheet to lift excess reserves, no matter what the Fed is buying, be it short or long-dated treasuries, furniture, mortgages, or stocks.
After the meeting this week, we think Fed Chief Jerome Powell will hint the Fed is done for this year, even though the issues he used to justify rate cuts are still in play. He has hinted at short-term rate stability before, but buckled to market pressures to cut rates further. This time we think the hint will stick. Unless trade negotiations go south quickly, we think this will be the end of the rate cutting cycle. In the meantime, stay bullish on equities and expect bond yields to move higher.
-Brian Wesbury, Chief Economist 10/29/2019
This report was prepared by First Trust Advisors L.P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell and security.