Fed Cuts Rates as Reserve Operations Begin Amid Liquidity Strain
Today’s FOMC decision to cut rates by 25 basis points, along with the introduction of reserve management operations, was widely expected—at least by me, and consistent with what I had been highlighting ahead of the meeting. It seemed clear that the Fed needed to prevent reserves from falling further, as the decline had been putting pressure on the overnight funding market, which we have been discussing here for months. Instead of freezing assets, they are trying to stabilize reserves, which is the more pressing issue. Perhaps things were worse behind the scenes than on the surface.
The Fed clearly felt it had to act, announcing roughly $40 billion in bill purchases this month. In reality, this mostly offsets the week-to-week fluctuations we typically see on the balance sheet and may help lift reserves slightly. But the move feels a bit late, and the way they are implementing it almost comes across as a half-baked approach.
The $40 billion does not appear to be a static amount. It sounds as though we will be learning the specific figures on the ninth of each month, at least until April, when the operation is expected to end. It is probably not a coincidence that the operation concludes around the same time Jay Powell is set to step down as Fed chair. It may even have been structured intentionally so that a new chair can come in and implement whatever policies they believe are appropriate.
In a way, it seems Powell is trying to avoid letting the situation continue deteriorating under his tenure and is positioning himself to step aside before anything unfolds that could make the current environment worse.
However, the real proof will come when we see how the overnight funding market actually behaves on a day-to-day basis—where SOFR trades and where volumes settle—and that will ultimately determine whether this operation is truly successful. In my view, $40 billion is unlikely to be enough to offset year-end funding pressures, and it will probably not be sufficient in January to meaningfully lower the rate pressures we have been seeing in a short period of time. But again, the results will speak for themselves as we monitor these dynamics day to day.
Luckily, this comes at the perfect time for the $80 billion in Treasury settlements on Monday, 15 December.
Anyway, Oracle is getting smashed, down 10% today, after its cloud revenue missed estimates and the company noted that CAPEX was rising to $50 billion from $35 billion. I guess that means tomorrow we will be on CDS watch for the AI names once again.
-Mike
Glossary by ChatGPT
Basis Points (bps) – A unit equal to 1/100th of a percentage point, commonly used to describe interest-rate changes.
CAPEX – Capital expenditures made by a company to acquire, upgrade, or maintain physical or technological assets.
CDS (Credit Default Swap) – A financial contract providing protection against the default of a borrower or issuer.
FOMC (Federal Open Market Committee) – The Federal Reserve body responsible for setting U.S. monetary policy, including interest rates.
Overnight Funding Market – The market where financial institutions borrow and lend funds for one day to manage liquidity needs.
Reserve Management Operations – Central bank actions aimed at adjusting reserves in the banking system to maintain stable short-term funding conditions.
SOFR (Secured Overnight Financing Rate) – A benchmark rate reflecting the cost of overnight borrowing collateralized by U.S. Treasury securities.
Treasury Settlements – The scheduled completion of Treasury securities transactions, involving payment and delivery of securities.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.