Fed appears to be on hold after 25 bp rate cut

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The Federal Open Market Committee cut the fed funds rate target 25 basis points to a range of a 1.50% to 1.75%, a move that was widely expected.

The Fed appears to be on hold after today's cut.

So now the question before market participants has become: Will further accommodation be required or will the aggregate 75 basis point rate cut be sufficient to bolster growth, minimize risks to the economic outlook, and lift inflation to sustainably meet the Central Bank’s 2% target?

“If [Federal Reserve Board Chair Jerome] Powell and team are truly committed to extending the recovery for as long as possible, consideration must be given to the noted mark downs of domestic growth forecasts,” said Jeffrey Lipton, head of municipal and fixed income strategy at Oppenheimer & Co. “However, we believe that the current U.S. economic profile supports a less dovish posture — at least for now.”

Lipton added that certainly, trade and geopolitical disruption will consume much of the policy narrative the rest of this week given that these evolving concerns have been at the heart of this temporary easing cycle.

“We have to believe that a new layer of tariffs upon Chinese exports into the U.S. scheduled to take hold in December could be used as a bargaining chip by either side as the process moves forward,” he said.

Lipton continued to say that although he believes that a deal of sorts gets done over the near-term, the ability to monitor compliance with its terms will likely be a challenge and so he said he wonders what types of remedial triggers would be part of the deal.

“Although we offer a modest risk of recession over the near-term, we continue to view a slowing global economy against an uncertain trade and Brexit backdrop as a meaningful risk determinant that could bring the longest running U.S. recovery to an abrupt conclusion,” Lipton said.

The post-FOMC meeting statement no longer says the panel will act as appropriate to prolong the expansion. In a press conference, Powell said the economy is doing well, with a strong labor market.

With inflation expectations, and actual reads of inflation, below the Fed’s 2% target, Powell said the Fed isn’t thinking about raising rates anytime soon, and the current rate is “likely to remain appropriate” if data comes in as expected, and GDP growth remains near 2%. The Fed would change its stance if it saw a material change in its outlook.

The Fed had taken three “insurance” rate cuts because of slowing global growth, uncertainties regarding trade, and below-target inflation, he said.

“I strongly believe this is the right action,” Powell said, when asked if there was any consideration of waiting for the next meeting to make the cut.

ICI: Muni funds see $1.7B inflow
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $2.194 billion in the week ended Oct. 23, the Investment Company Institute reported on Wednesday.

It was the 43rd straight week of inflows into the tax-exempt mutual funds and followed an inflow of $1.687 billion in the previous week.

Long-term muni funds alone saw an inflow of $1.915 billion after an inflow of $1.520 billion in the previous week; ETF muni funds alone saw an inflow of $279 million after an inflow of $167 million in the prior week.

Taxable bond funds saw combined inflows of $8.275 billion in the latest reporting week after inflows of $8.786 billion in the previous week.

ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $4.868 billion after revised outflows of $10.685 billion in the prior week.

Secondary market
Munis were mixed on the MBIS benchmark scale, with yields unchanged in the 10-year and rising by less than one basis point in the 30-year maturity. The MBIS AAA scale was mixed, with yields decreasing by less than a basis point in the 10-year maturity and increasing by one basis point in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on both the 10- and 30-year maturities were unchanged at 1.55% and to 2.14%, respectively.

The 10-year muni-to-Treasury ratio was calculated at 86.2% while the 30-year muni-to-Treasury ratio stood at 94.1%, according to MMD.

Treasuries yields were trading lower and stocks were in the green. The Treasury three-month was down and yielding 1.619%, the two-year was down and yielding 1.628%, the five-year was down and yielding 1.626%, the 10-year was down and yielding 1.786% and the 30-year was down and yielding 2.259%.

Previous session's activity
The MSRB reported 32,464 trades Monday on volume of $8.31 billion. The 30-day average trade summary showed on a par amount basis of $10.65 million that customers bought $5.86 million, customers sold $2.90 million and interdealer trades totaled $1.89 million.

New York, California and Texas were most traded, with the Empire State taking 15.279% of the market, the Golden State taking 11.984% and the Lone Star State taking 8.675%.

The most actively traded security was the Miami Dade County, Fla., water and sewer revenue taxable 3.49s of 2042, which traded 27 times on volume of $48.91 million.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation.

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