October 31, 2019 – Two major dealers – Goldman Sachs and Morgan Stanley – issued reports concluding yesterday’s FOMC 25bp cut may be the “final step of a 75 bp mid-cycle adjustment”.

Goldman Sachs’s report – “They’re Done” – said that Fed Chair Jerome Powell set a high bar for future cuts during the post-meeting press conference, noting that trade and Brexit-related risks have subsided and that “monetary policy is in a good place”. Goldman found the tone at the meeting “hawkish” (“firmer than we ha anticipated”) and now see a 15% chance of a rate cut in the December meeting – a lower probability than market consensus of 25-30%. Analysts also noted that rate hikes were less likely given the Fed’s view that inflation was benign.

Morgan Stanley’s report – “FOMC Reaction: Setting High Hurdles for Action” – indicated a slightly less hawkish tone. Morgan’s analysts stated that “the statement retained flexibility”, but conceded that “Chair Powell lifted the bar for further action during the Q&A”. Morgan Stanley also expects the Fed to maintain fed funds rate at the current levels for the rest of the year. Finally, the report noted that a long position in USD 2yr and 5yr notes might be attractive, given a “material” deterioration in the outlook may lead to a material reduction in rates. If the U.S. economy were to experience a downturn, Morgan analysts opined that “the next rate cut could more easily be a 50bp rate cut instead of a 25bp rate cut”.

Contact Jenny Lee at JLee@BuyMuni.com.