The quarter-point reduction in the Fed Funds’ range to 1.75-2.00% had been widely expected. Instead, investors focused on the guidance by the central bank on future policy moves. Their hopes were slightly dashed as no clear signal about a further rate cut for 2019 was forthcoming. The Fed nudged up its forecast for economic growth in 2019 to 2.2%, leaving the figure for 2020 unchanged at 2%. The US labour market is fighting fit, the jobless rate is set to remain low and inflation is unlikely to deviate from its moderate path. Jerome Powell thinks that fine-tuning is all that is needed to support the economy.

Some stress was seen in the US interbank market last week. The surge in repo transactions to far outside the Fed’s range stoked fears of a liquidity crunch. But this depletion in banks’ reserves was shown to be mainly circumstantial. Companies had to pay their federal tax bills by 15 September, and the US Treasury (whose deficits are rocketing) had conducted some sizeable auctions. The New York Fed moved in to calm the turmoil, supplying massive injections of reserve liquidity out to 10 October, if required.

Elsewhere monetary policy remains nice and loose. The People’s Bank of China lowered its prime rate on 12-month loans to 4.2%, making credit cheaper in an attempt to counteract the damage from trade wrangling with the US. The Bank of Japan kept its policy rate unchanged but by cutting back on bond buying, it has signalled that it would like to see a steeper yield curve. Meanwhile, the SNB has held its negative rate at -0.75% but is making life slightly easier for banks. The basis for calculating the levy arising from the negative rate will be adapted as of 1 November to lighten the burden.

Manufacturing indices in Europe are in a poor state. Germany’s flash manufacturing PMI this week sunk to 41.4 – its sharpest decline since the 2008 financial crisis. With all this going on, the risk of upsets is high and investors need to take care with their asset allocation.

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