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Fed Minutes Show Rates On Hold, Repo Discussion Front And Center

Policy is "appropriate". Unless there's a world war.

The Fed stressed the relative appropriateness of monetary policy’s current configuration at the December meeting, minutes from last month’s pow wow released on Friday show.

The Fed of course kept rates on hold at their final meeting of the year, and there were no dissents. It was the first unanimous decision since May.

The dot plot showed no hikes in 2020, consistent with the “good place” characterization of policy that Jerome Powell and his colleagues had been keen to perpetuate since the third “insurance” cut in October.

The minutes show officials believed rates at current levels are likely to remain appropriate for a time, absent a material change. Again, that’s consistent with the “good place” narrative and underscores the notion that absent some manner of left-field event (like, say, war with Iran) rates will remain on hold.

The account of the meeting shows many saw the risks as somewhat skewed to the downside, although some risks had eased.

Traders and market participants were looking for any color on how the Fed was thinking about a possible year-end squeeze in short-term funding markets like that which came calling in September. Generally speaking (and not surprisingly), the minutes reflect an upbeat assessment of the effectiveness of the repo operations and bill purchases:

Reserve management purchases of Treasury bills continued at a pace of $60 billion per month, with propositions remaining strong and little discernible effect on market functioning. While these purchases accumulated, the Desk continued to conduct regular repurchase agreement (repo) operations in order to maintain reserves at or above the level that prevailed in early September. Repos outstanding from these Desk operations totaled roughly $215 billion per day, consisting of both overnight and term operations. As reserve levels increased, the distribution of reserves across bank types became comparable with where it was in early September. The federal funds rate and other overnight money market rates fell modestly and were close to the interest on excess reserves (IOER) rate for most of the period. The intraday dispersion of rates was also lower than when reserves were at similar levels before September. In addition to helping keep reserves ample, repo operations likely have reduced pressures in money markets and the dispersion in money market rates.

There were also references to the risk that ongoing bill buying could eventually affect liquidity and thereby force the Fed into coupon purchases or, more to the point, QE “proper” (although still at the short-end). To wit:

The manager discussed two operational considerations around policy implementation. The first involved the risk that future Treasury bill purchases could have a larger effect on liquidity in the Treasury bill market in light of expected seasonal declines in bill issuance and the Federal Reserve’s growing ownership share of outstanding bills. If this risk were to materialize, the Federal Reserve could consider expanding the universe of securities purchased for reserve management purposes to include coupon-bearing Treasury securities with a short time to maturity. Purchases of these short-dated securities would not affect broader financial conditions or the stance of monetary policy. The manager also discussed expectations to gradually transition away from active repo operations next year as Treasury bill purchases supply a larger base of reserves. The calendar of repo operations starting in mid-January could reflect a gradual reduction in active repo operations. The manager indicated that some repos might be needed at least through April, when tax payments will sharply reduce reserve levels. 

As reserves remain ample, the manager noted that it may become appropriate at some point to implement a technical adjustment to the IOER rate and the offered rate on overnight reverse repurchase (ON RRP) agreements. Should conditions warrant this adjustment, the IOER rate could move closer to the middle of the target range for the federal funds rate, and the ON RRP rate could be realigned with the bottom of the target range.

Overall, the discussion around preventing another funding squeeze plays fairly prominently in the minutes. A generous interpretation would be that the amount of attention it’s afforded is a sign that policymakers are now sufficiently attuned, even if they’re not quite as obsessed with the situation as Zoltan Pozsar would like them to be.

In any event, we made it into 2020 and the world is still spinning (Trump’s best efforts to start World War III aside), so it does not appear that a clog in the proverbial plumbing is poised to disrupt markets anytime soon. Pozsar would likely claim that his note (see the link for a summary) played a role in averting a year-end disaster. We’ll never know.

On inflation, the following passage is highly amusing:

Regarding inflation, participants recognized that segments of the public generally do not regard the fact that aggregate inflation is running modestly below the Committee’s 2 percent goal as a problem. A few participants noted that the public’s view on this issue was understandable from the perspective of households and businesses going about their daily lives in an economy with low and stable inflation.

Turns out, people don’t necessarily want to pay more for stuff.

Other headlines from the minutes largely reflect the party line around current policy being appropriate for the conditions which prevailed at the time.

But we all know how quickly conditions can change, and considering it’s an election year, you can expect Donald Trump to top last year’s 50+ social media exhortations for lower rates.

Full minutes

fomcminutes20191211

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