Fed takes one more step toward normal

09-26-2018

Today’s Federal Reserve proceedings went according to expectations, and they were welcome, especially for cash managers. The Fed raised the fed funds target range a quarter point to 2-2.25%, in what Chair Jerome Powell described during the press conference as one more step toward returning interest rates to more normal levels.

One development, or lack thereof, was that the policymakers did not make another technical adjustment to the interest paid on excess reserves (IOER). That rate moved up a full 25 basis points, to 2.20%, with the rate on the Fed’s reverse repo facility at the 2% lower bound. It’s not an issue most in the financial world are concerned with, but it is important to money markets. We expect rates on overnight repurchase agreements to reflect the new target range in tomorrow’s trading session.

The statement noted labor market and economic strength, and inflation near 2%. Although also anticipated, one change that got press and industry attention was the removal of the reference to monetary policy as being “accommodative.” While not significant in itself, it reflects the central bank’s approach to communications. Indeed, Powell confirmed during the press conference the deletion does not signal a rate-path change. Monetary policy still is accommodative in the context of the Fed’s longer-run projections.

Turning to the dots, the median projections for 2018, 2019 and 2020 did not shift. The respective projections of 2.4%, 3.1% and 3.4% reflect an additional hike this year, three next year and one the following. New to the plot this time around was the addition of projections for 2021, for which the median dot of 3.4% implied no further tightening, although the individual projections ranged widely. The long-run dot edged up slightly to 3% from 2.9%. Today’s meeting marked Richard Clarida’s first meeting as Fed governor, and there were no dissents.