The Federal Open Market Committee on Wednesday retained its policy rate at a range between zero and 0.25% as it updated its policy statement to reflect a three-month surge in inflation. The meeting came as the spread of the delta variant spurs new questions about economic growth and brings rising risks to the path of policy and the economy.
Fed officials face difficult choices on when and how to begin paring back regarding the monetary accommodation of $120 billion in monthly asset purchases.
While the Federal Reserve delivered on the dovish expectations implied by pricing action and market talk, the brief period of extreme optimism inside policy circles has clearly ended. Now, Fed officials face difficult choices on when and how to begin paring back regarding the monetary accommodation of $120 billion in asset purchases that the central bank makes each month.
Given that policy challenge, the Fed interjected a key new phrase into the statement in the policy paragraph that discussed the central bank’s progress toward maximum employment and pricing stability: “Since then, the economy has made progress toward these goals, and the committee will continue to assess progress in coming meetings.”
The use of the phrase “coming meetings” in our view takes off the table any prospective roadmap on the tapering of asset purchases that might have been introduced next month at the Fed’s symposium on monetary policy at Jackson Hole, Wyo.
We now expect the Federal Reserve to wait until its December meeting to announce the composition, magnitude and pace of its withdrawal of accommodation from financial markets that should begin in early next year.
We anticipate that this will take the better part of next year, and that implies that any prospective increase in the federal funds policy rate will not begin until late next year or in the first half of 2023 at the earliest. This will all be contingent on the path of the pandemic, inflation and inflation expectations in the near term.
The Fed now finds itself in the most challenging of circumstances. It needs to obtain more information around the delta variant and its impact on the economy. And Federal Reserve Chairman Jerome Powell used the press conference to respond to pressures that the Fed begin withdrawing accommodation in light of what may well be sticky inflation, even if those pressures are not reflected in the markets.
In a technical statement on policy operations, the Fed announced the construction of a domestic standing repurchase agreement (repo) facility—SRF—and a repurchase facility for foreign and international authorities that will be known as the FIMA repo facility.
From the Fed’s announcement: “Under the SRF, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to conduct overnight repo operations with a minimum bid rate of 0.25% and with an aggregate operation limit of $500 billion, effective July 29, 2021. As with the desk’s existing repo operations, the SRF will be cleared and settled on the tri-party repo platform. Treasury, agency debt and agency mortgage-backed securities will continue to be accepted. All other terms will be the same as the existing overnight repo operations.”
The announcement added: “Under the FIMA repo facility, the FOMC directed the Desk to offer overnight repo transactions at a rate of 0.25% to foreign central bank and international accounts against their holdings of Treasury securities maintained in custody at the New York Fed, subject to a per-counterparty limit of $60 billion. Eligible counterparties are foreign official institutions with custody accounts at the New York Fed that have been approved by the Foreign Currency Subcommittee of the FOMC.”
This technical move intends to permit the Fed to more effectively maintain the policy rate and address recent churn in short-term markets.
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