Analysts at Wells Fargo, expect the Federal Reserve to cut rates in October and then two more times. They point out the recent announcement of the Fed to buy Treasuries did not push US yields lower.

Key Quotes:

“Fed Chairman Jerome Powell disclosed that the Federal Reserve would resume bill purchases in order to help stabilize the overnight funding markets. Powell was quick to note that this did not mark the beginning of another round of Quantitative Easing but rather was aimed at simply bringing stability to the short-term funding markets. Banks appear to be using reserves differently in this cycle, requiring the Fed to maintain a larger balance sheet than previously thought. The Fed’s move should help prevent a more significant liquidity crisis that might cause real trouble for the economy from developing. But the Fed also does not want anyone to interpret this move as an easing. Given the rise in yields this week, it appears the market is taking the Fed at its word.”

“The slightly better than expected inflation reports clear the way for the Fed to cut the federal funds rate by another quarter point at its October 29-30 FOMC meeting. We would expect to see one or two dissents, as FRB Kansas City President Esther Georgemade it clear this week that she does not see anything in the inflation data that would indicate that inflation expectations have shifted toward disinflation or deflation. We continue to look for two more quarter point cuts, as the Fed sees the current environment reminiscent of the late 1990s, when slower growth overseas caused the Fed to cut the federal funds rate three times, a total of 75 bps, which then reignited growth and allowed it to hike rates later in the cycle.”