The Federal Reserve Open Market Committee attempted to thread the needle in its January meeting by maintaining its existing policy rate while acknowledging moderating real consumption. The FOMC policy statement implied a coming downward revision to the summary of economic projections at the March meeting on the back of a change in its language around real consumption where it now refers to spending as “moderate” rather than the “strong” description used earlier. Meanwhile, the Fed maintained its policy rate in a range between 1.50% and 1.75% and noted a technical adjustment to the interest paid on excess reserves (IOER) rate, increasing it to 1.6% from 1.55%. The technical adjustment in the IOER rate was conducted to facilitate the trading of the funds rate well within the policy target range of 1.5% to 1.75%. Public and investor expectations should not interpret the technical adjustment as signaling a change in monetary policy that involves a near term increase in the policy rate.
In his post-meeting press conference, Federal Reserve Chairman Jerome Powell chose to preempt the financial media on risks around the coronavirus. Powell noted that uncertainties around the outlook remain. “[T]he Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate,” the statement read, with global developments likely referring to risks posed by the new coronavirus outbreak.
Powell also noted that the Fed will begin to gradually wind down its repurchase operations at the front end of the curve in an orderly fashion over the reminder of the first quarter of 2020, with the month of April a likely point at which it will end. The Fed will continue purchasing $60 billion Treasury bills per month, the same pace as it has recently utilized. We anticipate a gradual tapering in April and a move toward natural growth in the balance sheet.
My sense here is that the Fed is still in the process of debating the merits of a standing repurchase program, which we think will needed to be constructed to support the structural changes in the domestic system of finance.
