Fed Conducts Open Market Operations

September 23, 2019 Chatham Financial

Prior Week Summary

In an eventful week for market participants, the major U.S. equity indices ended a three-week stretch of gains as the drone attack of a Saudi Arabian crude processing plant and trade friction drove equity markets lower on the week. After 5% of the global oil supply was disrupted in the attack last weekend, the Trump administration accused Iran of conducting the strike and levied new sanctions on Iran’s central bank. Iran has denied involvement in the attack, but has warned that any aggression from the U.S. or Saudi Arabia would lead to “all-out war.” The rise in tensions comes as Iran is set to unveil a new Gulf peace initiative at the United Nations in the coming days.

The FOMC opted to cut the target range 25 basis points on Wednesday to 1.75% - 2% in a move long-expected by the market. The decision to cut 25 basis points drew three dissenters, the most in Powell’s tenure as Federal Reserve Chairman, with James Bullard advocating for a 50 basis point cut and Eric Rosengren and Esther George in favor of leaving the target range unchanged. Highlighting the split in consensus, now only seven of the 17 Federal Reserve officials are expecting another rate cut this year. The Fed Funds futures market is pricing in just over a 50% chance for a rate cut at the October meeting. The Federal Reserve Bank of New York conducted open market operations, injecting $75 billion of liquidity on four straight days, as elevated pressure in the short-term funding markets sent overnight rates soaring early in the week, pushing the Federal Funds Effective Rate outside of the Fed’s target range and causing SOFR to spike to 5.25% on Tuesday, 282 basis points above the previous day’s setting. The cause for the shortage of cash was largely viewed as technical in origin as a combination of quarterly corporate tax payments and the settlement of a $78 billion Treasury issuance. The Federal Reserve Bank of New York released a statement on Friday indicating that open market operations will continue in the near-term saying, “The Desk also will offer daily overnight repo operations for an aggregate amount of at least $75 billion each, until Thursday, October 10, 2019.”

The Look Forward

Market participants are in for a busy week of data releases as the third estimate of Q2 GDP, consumer spending, durable goods orders, and wholesale inventories dot the economic calendar.

Rates Snapshot

 

Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial

 

Fixed Income Snapshot

Source: Bloomberg Finance L.P.

Disclosures

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal/notices/.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved. 19-0240

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