Fed pledges a steady hand
To no surprise, the Federal Reserve kept monetary policy unchanged today, with the federal funds target range at 1.50%-1.75%. In October, the Fed had asserted that, absent a “material change,” monetary policy was in a good place. With modest improvement in global and domestic growth but with inflation still running below target, developments since that time were not enough to move the policy needle. Indeed, policymakers feel confident enough about the state of monetary policy to remove a reference to an uncertain outlook from the policy statement. The new “dot plot” revealed at this meeting reflects expectations by Federal Open Market Committee participants for GDP growth of 2% and Fed policy on hold through 2020.
Once again, the discussion of the repo market overshadowed the Federal Reserve’s policy announcement today. Chair Jerome Powell fielded a number of questions during the press conference about the steps the Fed is taking to address potential of repo market volatility at year-end. Since the spike in repo rates in September, the Fed has been engaging in temporary and permanent open market operations to ease the strains in this important funding market. In fact, it is scheduled to have added an estimated $500 billion of additional reserves to help facilitate trading by the time Dec. 31 rolls around, with more details to be released by the end of the week.
Concerns remain, however, that these liquidity measures do not address completely all of the strains in the market, and that we may experience dislocations over the turn similar to last September as a result. Powell addressed this by emphasizing the Fed stands ready to provide liquidity as needed, and that it continues to evaluate the steps that could be taken to relieve supervisory and regulatory constraints that may be limiting to some participants without compromising safety and soundness. Upward pressure on repo rates at year-end is not an unusual occurrence. In spite of the trepidation reflected in media headlines, we continue to feel comfortable it is a matter of plumbing and not of credit strains.