Fed Minutes are Already “Old News”, Credit Spreads Steady

Today’s Fed Minutes release indicates Fed officials’ continued comfort level with the status quo on interest rates. It has the feel of a “victory lap” as rate policy, inflation and growth all seem to be in balance (for now). The minutes reveal the board’s feeling that there is less risk and uncertainty regarding Brexit, global economic outlook, etc. Note that the minutes were taken 3 days before the recent tariff escalations and breakdown in trade talks. With this new uncertainty (and some predictions of a long drawn out trade war with a permanent reordering of the relationship of the world’s two largest economies), a possible rate cut is more likely than an increase. Again the term “idiosyncratic factors” was used to describe the low inflation numbers, suggesting that there is a higher “normalized” inflation rate lurking in the data (but still not high enough to warrant Fed actions such as a rate increase). The 10 year T is at 2.39%. Now that indices have dropped and spreads remained tight, there has been an uptick in lending and issuance of debt backed securities (Fannie, Freddie, CMBS, CLO, etc). Spreads are widening slightly in the secondary market, but lenders competing for business are holding spreads tight, taking less margin for now. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners