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Companies and hockey teams adapt well to being shorthanded, but when votes are involved or diverse viewpoints are needed, being even one person down can create problems. So it has been for some time now at the Federal Reserve (Fed) as the molasses pace of confirmation has left the central bank short-staffed for months. It still has three seats out of seven open on its board of governors, nearly a majority, and that’s only the case because the Senate confirmed Stanley Fischer to the board the day that governor Jeremy Stein stepped down, Wednesday, May 28.
Considering that the governors of the board make up a majority of the twelve member crucial monetary policy-making Federal Open Market Committee (FOMC) (the others being the presidents of some of the regional Fed banks), three open seats represents a significant shortage that has serious consequences from the standpoint of the U.S. economy, not to mention the world.
Even if new voices on the FOMC didn’t alter a particular vote on policy which is still data driven, we at least would get more viewpoints in speeches, in published dissents and in the influential “dots” chart of rising interest rate projections. Certainly the last release of the chart had a major impact on the market in March. Eventually things calmed down and the market deemphasized it, but the dots matrix offered a window into what the entirety of the committee thought. The full complement of policymakers might have pushed it more bullish from the standpoint of rates rising sooner, which we felt was the case. Or it could have had the opposite effect, depending on who those three would have been. Until the rest of the confirmations happen, the dots chart potentially could be skewed. It is an angle that has potential bearing on the world economy.
And the absence of a vice chair after Janet Yellen left that position to lead the Fed has put a vacancy in a key position. Presumably we will have Fischer, former governor of the Bank of Israel, announced as vice chair soon. He adds an element of cautiousness about rates staying too low for too long that Yellen and former chairman Ben Bernanke doesn’t seem is an issue for them. Fisher has spoken out on concerns with the QE program, that being able to unwind and control inflation all at the same time after years of stimulation might be a difficult process. That’s a different viewpoint. So the more voices on the FOMC, the better balanced the output will be.
The Rates They Aren’t A-Changin'
In the meantime, there hasn’t been much rate change in the marketplace. The London interbank offered rate (Libor) was completely unchanged and Treasury bills were around a basis point lower. We have not altered our weighted average maturity (WAM) targets at this point because the yield curve has not changed based on any kind of expectations of future tightening at this point.
Repo continues to be driven by the overnight fixed-rate reverse repo facility from the New York Fed at five basis points. Probably over the course of the last month we have seen more people going to this and abandoning at least some of their traditional counterparts to a larger degree than we had in the past. We haven’t seen major players leave the repo market, but certainly the banking regulations and how they are impacted by capital, leverage and liquidity requirements is allowing them to reduce their book and the Fed is taking over some of that supply.
Still supply remains an issue. The New York Fed puts out $180-$200 billion per day pretty steadily and with the taper reducing the Fed’s asset purchases down to $45 billion a month from $85, we have an additional $40 billion each month. That should be a lot, but offsetting it has been the cutback in Treasury supply in the month of April and continuing into the month of May because of strong tax receipts that the Treasury receive. So supply is not as great as it seems when you first look at it.