The contrast between the Federal Reserve’s policy-setting meeting in September and the one that ended Wednesday is striking. In the former, Chair Jerome Powell seemed to have a jump in his step as he announced the Federal Open Market Committee (FOMC) had lowered rates by a quarter percentage point with only one, very expected, dissent by White House economist turned Governor Stephen Miran for a half-point cut. Powell had rallied the troops to make a policy decision the traditional way—based on economic data and not political pressure.
Wednesday, the Fed became a house divided. The decision to take the fed funds target range down another 25 basis points to 3.75-4% came with dissents on both sides: Kansas Fed president Jeffrey Schmid’s call for no change countered a repeat by Miran. In Powell’s attempt to explain this to the press he appeared anxious and threw considerable doubt on the likelihood of another ease in the December FOMC gathering.
About the only thing the FOMC seemed to agree upon was that its quantitative tightening should end on 1 December.
He waffled between dismissing the lack of government data due to the shutdown — claiming private data and the Fed’s own surveys were sufficient — and suggesting the lack of clarity („fog“) could slow the Fed down. He seemed to be setting the stage for a humdinger of a meeting in December. The markets have responded with confusion, seen in the drastic drop of expectations for a cut. We will re-evaluate our own forecast of a quarter-point reduction, hoping that government data will return soon. About the only thing the FOMC seemed to agree upon was that its quantitative tightening should end on 1 December. This was widely expected and is considered a good move by the market.
One additional note about the government shutdown. While the longer it drags on, the more the markets will depend on a limited amount of stale data, the financial machine itself has not changed. The US Treasury functions are not impacted; new debt is being auctioned and there are no constraints on trading with the Fed. The liquidity markets are working smoothly.
Tokens of gratitude
With the passing of the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act in mid-July, the liquidity industry has been awash with discussions about blockchain structures, stablecoins and tokens. For whatever reason, tokenised money market funds jumped to the forefront in October, with a news story or announcement seeming to come every day. For an asset class that could very well pass US$8tn, discovering additional avenues, use cases and distribution models is newsworthy.
As I have said before, we at Federated Hermes take a thoughtful and cautious approach to the technology. That was certainly the case this summer when we agreed to participate with BNY and Goldman Sachs in their tokenisation initiative and last month we made two of our UCITS money market funds available in tokenised form via Archax, a well-known digital assets operator in the UK. It’s an exciting time for the liquidity industry as it evolves into the digital asset space, in which we expect ongoing innovation and growth.
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