Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Bio
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
Bio
X •  LinkedIn
 
  No Cut in Sight
Posted Under: Government • Research Reports • Fed Reserve • Interest Rates
Supporting Image for Blog Post

 

Hold off on the Fed statement for a moment, Chair Powell's press conference was the real news today.  He noted that both GDP and employment came in above expectations while inflation surprised to the downside.  Inflation has become a recent bellwether for those trying to justify a rate cut.  Powell addressed this head-on, stating that lower inflation appears due to transitory factors, and the Fed expects inflation to return towards the 2% target moving forward.
 
There was little change to the Fed statement itself, on net, with stronger language on economic activity and weaker language on inflation.  Arguably the most dovish change came in noting that household spending and business fixed investment have slowed since the Fed last met.  But here, too, Powell stated that signs already suggest this will move higher in the quarters ahead.  In part, this improved forecasts comes from the global outlook, where growth prospects are improving, China trade negotiations appear nearly complete, and concerns about Brexit have been put on hold with the delayed deadline date.  With virtually every comment, Powell tilted decidedly hawkish.
 
There were two other items of note from outside the statement.  First, as was previously announced, starting tomorrow the Fed will begin to pare back the pace at which they let Treasuries roll off the balance sheet.  As of April, the Fed was reducing the size of the balance sheet by $50 billion per month, of which $30 billion came from Treasury securities and $20 billion from mortgage securities.  Moving forward, reductions in Treasury securities will be cut in half to $15 billion a month.  Mortgage securities will continue to be reduced at a rate of $20 billion per month. This will continue until October, at which point the Fed will stop balance sheet reductions. Mortgage securities will continue to roll off at a pace of $20 billion per month, but those proceeds will be invested into Treasury securities, keeping the balance sheet size the same and simply changing the composition of assets.
 
The second item of note was the announcement that the Fed is reducing the rate of interest paid on excess reserves (IOER) to 2.35% from 2.40%.  Before the press conference began, the financial media was pointing to this change as a sign the Fed is preparing for a rate cut. Cue Powell once again, stating that the change to the IOER rate is in no way representative of a change in policy stance.  In December of last year, the Fed increased the Fed funds rate 25 basis points but only moved the IOER higher by 20 points, essentially making the same 5 point cut announced today.  These are simply tweaks as the Fed learns how best to manage rates with large excess reserves in the system.
 
We don't anticipate a rate hike (and certainly not a rate cut) at the June meeting, but we will be eagerly awaiting the Fed's updated economic projections – the so called "dot plots." Any change in rate expectations should be towards higher rates.  And remember, the March Fed forecasts showed eleven members expecting rates to remain unchanged this year, four members expected one hike before year-end, while two members expected two hikes in 2019.  In sharp contrast, the markets – even after today's statement and the press conference – are pricing in a 50%+ chance of a cut this year, with zero chance of a hike. That is absurd.
 
The data continue to show an economy that warrants further hikes.  And if the 10-year Treasury rate moves above 3%, we expect we will get one.  That's not to say the pouting pundits will change their tone (or ever admit they were wrong), but those who zone them out are likely to be rewarded. Just as they have been these past ten years. 

Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist

Click here for PDF version

Posted on Wednesday, May 1, 2019 @ 3:53 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are 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 any security.
Search Posts
 PREVIOUS POSTS
The ISM Manufacturing Index Declined to 52.8 in April
Conventional Wisdom Wrong Again
Personal Income Rose 0.1% in March
Good-bye Recession Fears
M2 and C&I Loan Growth
The First Estimate for Q1 Real GDP Growth is 3.2% at an Annual Rate
New Orders for Durable Goods Rose 2.7% in March
New Single-Family Home Sales Increased 4.5% in March
Housing Starts Declined 0.3% in March
Existing Home Sales Declined 4.9% in March
Archive
Skip Navigation Links.
Expand 20242024
Expand 20232023
Expand 20222022
Expand 20212021
Expand 20202020
Expand 20192019
Expand 20182018
Expand 20172017
Expand 20162016
Expand 20152015
Expand 20142014
Expand 20132013
Expand 20122012
Expand 20112011
Expand 20102010

Search by Topic
Skip Navigation Links.

 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.