Anything that can go wrong …

18 September 2019 By Richard Beales Follow @richardbeales1

Cutting interest rates again was the easy part. The whimsical trade policy of President Donald Trump and threats to oil supplies call for insurance. But stress in money markets is partly the U.S. central bank’s own handiwork. Chair Jay Powell is discovering the Fed’s new normal.

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The U.S. Federal Reserve’s policy-setting committee on Sept. 18 cut its target overnight interest rate range by a quarter percentage point, to 1.75%-2%.

The Federal Open Market Committee’s statement noted the dissent of three voting members from the decision, one of whom preferred a half-point cut while two preferred to leave rates unchanged. And new projections by Fed board members and regional bank presidents showed the median forecast is for rates to be unchanged at the end of 2019 and 2020.

The central bank also widened the gap between the interest it pays banks on excess reserves and the top of its policy rate range, a step taken to smooth out problems in money markets that prompted a market intervention by the New York Fed.

The Fed on Sept. 18 offered to pump as much as $75 billion into U.S. money markets through an overnight repurchase agreement operation after the costs for securing overnight repurchase agreements spiked. Banks took $53 billion under a similar offer the previous day. It was the first time the federal funds rate had drifted outside the central bank’s target range since the financial crisis over a decade ago.

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