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well I think everybody knows they're gonna cut rates by 25 basis points it's pretty interesting that just a few weeks ago people were talking about a 50 basis point potential cut and even an intermediate that was sort of in the wind they're back at the end of August but now the bond market has really taken away the possibility of a 50 basis point cut with the backup and rates that's happened globally of about 25 or 30 basis points over the last couple of weeks so the Fed has a pretty easy job this time Bob Marcus says one cut no need for anything drastic and yet the stage is perfectly set for that interest rate cut today the real question is what's going to happen with the dots I kind of think the Fed almost wishes they hadn't come up with these dots thing because if it had a hard time predicting what their future path would be pretty much for the past year so we'll see what happens with the dots you might remember that the that the June meeting the idea was that they wouldn't be cutting rates here in 2019 but then just one meeting later they had to cut them once and they had no cut for 19 but one cut for 2020 will be interesting to see if they bring that cut in 2020 forward to 2019 I think that's going to happen and maybe say that 2020 they won't have to cut rates economic data got really soft globally there for a while but it has improved a little bit if you watch it closely in the past few weeks so the the serve urgency that was out there for more drastic things went away except for of course that kerfuffle with the repo market not having enough reserves and leading to this amazing spike in the overnight rate yesterday to almost 10% briefly before the Fed did the repo work so one thing it might have to happen here is the Fed might have to start QE Lite as I call it meaning that they go back to expanding their balance sheet in line with the increase in currency to get the reserves the free reserves in the system higher than what seems to be in this toggle point of where it is right now and about a little under 1.4 trillion the private have to get that higher the interesting to see if Jay Paul talks about that in the press conference I think he has - I think he'll be asked about it I mean that's not more QE is not the only solution you would admit to what's taken place in the repo market it's the one that you've mentioned it's I think maybe undoubtedly the most dramatic one but it's not the only solution and how well should we be about it that's a good question how worried you should be clearly short rates getting out of the feds control even briefly is problematic particularly because of the template of the past when it happened back in a wait surrounding Lehman Brothers it doesn't seem at all like that's likely to happen here but the problem is that there's not enough reserves in the system clearly to provide the liquidity and what they used to do before the global financial crisis was again I'll call it QE light what they do is they expand the balance sheet in line with the growth in the currency they could always do some sort of permanent repo facilities and the like right but it just seems to me that the Fed is almost anxious to start increasing their balance sheet again you know back in January in a in a u-turn from the December disaster where they said Qt forever it's in spite of economic realities you know they start talking about the potential of QE not being an extraordinary policy anymore but a regular policy tool so it would just seem that the the the skids are greased for the Fed to go and do that growth of the balance sheet in line with the growth in the currency like they did part of the global financial crisis but the fact that short rates are spiking obviously is in no way a positive the fact that the reserves seem to be at the right level except that they're not there obviously are pockets in the system where the liquidity isn't there and that's always a cause for concern especially because the markets are in a fairly stable place right now you imagine what would happen if you were in a situation where there was a real squeeze that at a quarter end or a year end or during a risk off sort of an experience in the markets so the Fed will will address this I think but I again I think it's going to be through expanding the balance sheet because they want to go that way look what look what Draghi just did last week I mean he said twenty billion dollars of cue five billion euros rather of QE per month on an open-ended basis I mean it's starting to see I was interesting I was in Europe at the time last week and I was meeting with a lot of very very major asset allocators and I noticed a real change in sentiment regarding what's happening with negative interest rates and ECB policy the change that I observed was there's been a pivot away from this idea that the circumstance that we're in in the ECB in the banking system there is temporary last time I was in Europe there's this feeling that negative interest rates were sort of a novelty that you had to kind of live through and suffer through and endure if you were a financial institution but the mood now seems to be that there's an awareness growing that this is a fundamental policy that central planners want to get the inflation rate substantially higher than the interest rate err put another way to keep the interest rate very much below the inflation rate for a negative real interest rates I think they're starting to realise that this debt problem that we have in the developed world is really starting to show up in the financial system just look at the underperformance of bank stocks as a sector in Japan in Europe pretty much persistently ever since interest rates went negative they're starting to realize that this is sort of a situation we've got ourselves in that has a long-term problem weirdly there's a contradiction between the long term problem being is exacerbated by short term solutions the way that central planners are dealing with the long term problem of negative interest rates being fatal to the banking system is weirdly more negative interest rates because they think that's going to help in the short term but eventually as we know and this is a theme that I've been thinking about a lot as this year has progressed eventually a lot of short-term solutions that exacerbate long-term problems lead you into a reality where finally enough short term things lead to the future the long term being now and I think that's starting to happen with negative interest rates and the I the solution in terms of slowing down the long term coming into our reality is to keep interest rates well below the inflation rate in other words negative real interest rates as much as possible which is a really problem for investors who are fixed-income focused like they are particularly in Europe where they're basically saying that the objective of the central planners is to make bondholders lose purchase lose purchasing power systematically over time you
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