Deep divisions in FOMC cloud US policy outlook

ednesday’s FOMC minutes failed to add a huge amount that we didn’t already know, with policymakers clearly divided as to the need for an imminent rate cut at the September meeting. According to the minutes ‘most participants believed that a reduction of 25 basis points in the target range for the federal funds rate would be appropriate’. They suggested that a number of key uncertainties (i.e. the trade war) would unlikely be resolved soon, although it would not derail the expansion of the US economy.

Investors expectations for future rate cuts were little changed following the release, with the market continuing to price in more than a 50% chance of two more rates cuts before the end of the year, one in October and another in December. This still seems a bit aggressive to us, and we instead expect just one rate cut, followed by a pause as the Fed assesses the impact the cuts are having on the US economy.

Will the ECB minutes shift the euro today?

Major central bank announcements continue to come thick and fast this week, with investors gearing up for this afternoon’s European Central Bank meeting accounts. We think that the September accounts will likely take on more importance than previous ones, given that policymakers in the bloc unexpectedly restarted the bank’s quantitative easing programme last month.

According to numerous reports, there was deep division among the committee as to the need for the reintroduction of the programme, with President Draghi reportedly ignoring objections within the Governing Council. Investors will be paying close attention to just how deep these divisions run within the bank’s rate-setting committee this afternoon. This was reportedly one of the few instances in his eight years as President that Draghi has ignored the will of the committee. The lack of a more dovish consensus within the bank is pretty significant given that Draghi will soon be replaced by the now former IMF chief Christine Lagarde.

Johnson, Varadkar set for more Brexit talks

The mess that is Brexit continues to drag on like a bad book. EU leaders stated yesterday that progress towards a deal had been limited and that the UK had put forward ‘untested ideas’.

Boris Johnson is set to continue talks with his Irish counterpart Leo Varadkar today, although investors have very low expectations for any form of meaningful compromise being struck. Sterling itself has actually been pretty range bound despite the news over the last 24 hours, largely given that it merely confirms what investors already knew – the chances of a Brexit deal getting over the line before the end of the month are effectively zero.