- The Federal Reserve cut the Fed Funds Rate by 0.25% and slightly raised their GDP forecast.
- Separately, the Fed began providing liquidity to cash markets.
- The liquidity operation is not like 2008, occurring for differing less-worrisome reasons.
The Fed’s Busy Week The Federal Reserve had a busy week after policymakers voted 7-3 on September 18 to cut interest rates a second time this year, yet the central bank remains deeply divided on future rate direction. The Fed Funds Rate, the key lending rate to banks, was lowered by 0.25% to 1.75%-2%, with the majority of members signaling a preference for no further reductions in 2019 unless economic conditions warrant it. Separately, the Fed raised its 2019 GDP outlook to 2.2% from 2.1%. Before the rate cut on Tuesday, September 17, the Federal Reserve Bank of New York conducted an overnight “Repurchase Operation,” its first in over a decade. Repeated daily through September 25, these Fed interventions collectively added over $491B in cash liquidity to address a dislocation in the overnight credit funding market. These actions were needed to relieve money-market stresses, and were commonplace in the pre-financial crisis era, by temporarily injecting cash with the Fed taking government securities as collateral. These repurchase “repo” operations are aimed to better align repurchase rates back to within the Fed Funds target range of 2%-2.25% before the recent interest rate cut to the new target range of 1.75%-2%. If you are confused by all this, you are not alone. Let’s try to simplify.