Will The Fed Cut Rates by More Than Investors Expect In March?
It is rare that the Fed acts in an orderly fashion when it lowers its Fed Funds rate. The Fed typically lowers rates quickly in response to negative economic events whether they be the credit market freezing, spiking unemployment or a plunging equity market. Our view is that the Fed eased prematurely in an effort to provide the large banks (BofA in particular) with air cover insofar as bank unrealized losses were concerned. A 75-100 BPS rate cut on March 20th is quite possible rather than the 25 BPS the market is expecting (per CME FedWatch). I do not expect the Fed to cut rates on January 31st.
If we use the Fed’s Overnight Reverse Repo (ON RRP) facility as a proxy for excess liquidity in the system, that facility is shrinking and may be in the $0-200 billion range at the time of the Fed’s March 20th meeting given the pace of the current drawdown (the ON RRP stood at $603 billion last night).
Expectations are for the Fed to cut its Fed Funds Rate by 25 BPS when the FOMC meets on March 19th and 20th (CME FedWatch Tool chart below).
It would not surprise me if the Fed cut rates more sharply given Fed Chair Powell is dovish at heart with a capital “D”.
The Fed has already eased policy beginning with its December FOMC meeting.
We may see a halt to QT before we see a March rate cut.
Also, let’s not forget that the Fed has announced that it plans to allow its BTFP bailout to expire on March 11th. That’s just the monetary policy side…
Fiscal spending year-to-date is $1.62 trillion, up $171 billion over last year, a 12% increase. I fully expect the Biden Administration and a spend-happy Congress to ramp up deficit spending given that 2024 is an Election year (how does a $2-3 trillion fiscal deficit sound?) The Fed of course will be there to purchase any new Treasury issues that are not purchased by private capital or sovereign nations. I fully expect the Fed’s balance sheet to grow in 2024.
