Dwelling on the details
The Federal Reserve kept monetary policy unchanged today, maintaining the fed funds target range at 1.5%-1.75%. It did, and said, nothing to change expectations that policy will be on hold for a while. The majority of the action came from the press conference. Chairman Jerome Powell characterized policy as being well-positioned, with the expansion in its 11th year and the pace of job gains solid. Although noting there is more clarity with respect to trade and cautious signs that sluggish global growth may be stabilizing, Powell said uncertainties remain. He identified the potential impact of the coronavirus as one of these, but emphasized it was too early to know what the effects could be on domestic or global growth. With respect to inflation, officials of the Federal Open Market Committee (FOMC) expect it to move closer to 2% as low readings from last year drop out of the year-over-year calculation. But Powell emphasized that many FOMC participants would not be satisfied with inflation readings running below 2%.
The Fed did make technical adjustments to two of its administered rates, raising the interest on excess reserves (IOER) from 1.55% to 1.60% and the rate on the reverse repo facility from 1.45% to 1.5%. These adjustments were intended to keep the fed funds rate within the established target range (recently, it had drifted to the low end). We anticipate repo rates to trade incrementally higher as a result.
During the press conference, Powell also spoke at length about and fielded several questions related to the volatility in the repo market in September. He characterized the Fed’s response to the situation through the use of temporary and permanent operations as “prompt, decisive action.”
He confirmed the Fed would be continuing with temporary open market operations at least through April. The Fed's permanent operations, consisting of the purchasing of Treasury bills, will continue into the second quarter. At that point, policymakers expect reserves to return to a level considered plentiful enough to avert frequent intervention. The minimal level apparently is around $1.5 trillion. Powell said that the Fed had not made a decision about the need for a standing repo facility at this point, and that it continues to study the role regulation may have played in the repo-market dislocations.