No small matter
The Fed's slight adjustments to overnight rates should have a big impact.
I have to wonder at my choice of profession when a “tweak” to administered rates by the Federal Reserve can make my day. But money markets breathed a collective sigh of relief today as policymakers decided at the Federal Open Market Committee meeting to raise the rate on its Reverse Repo Facility and Interest on Excess Reserves by 5 basis points each, to 5 basis points and 15 basis points, respectively. These adjustments have no broad monetary-policy implications but may help rates on short-term securities to move ever so slightly off the near-zero levels where they have been trapped since February. We expect repo rates to move in lockstep with the Fed action, and those of other securities also to shift higher.
This technical action aside, Chair Powell covered the expected themes during the press conference, noting that the labor markets have improved but that caregiving needs, virus fears and unemployment benefits may be weighing down on the ability of some to return to work.
With the Fed insisting on seeing further progress toward full employment before considering additional policy action, the next several months of jobs figures will be particularly important. Inflation was discussed, of course, and while Powell attributed much of the price pressures as of late to be transitory—resulting from rapid shifts in demand against supply constraints that should ease over time—he acknowledged that some of these pressures might stay around longer. The Summary of Projections reflected this, with the median PCE inflation projection for 2021 rising a full percentage point to 3.4% from 2.4% in March, before tailing off to just above 2% for the subsequent two years. The median projection for GDP for 2021 was notched higher as well, from an already robust 6.5% to 7% for the year, followed by growth of 3.3% and 2.4% for 2022 and 2023, respectively.
Finally, we got a new “dot plot” projection, and while Powell did his best to dismiss the significance of the dots, the median fed funds projection reflected lift-off by the Fed in 2023, with two rate hikes by the end of that year. This is consistent with our own view that the rapid reopening and pace of vaccinations could lead to the Fed starting the normalization process sooner than originally thought. There appeared to be actual talking about talking about tapering at this meeting, if only to conclude that further progress needs to be made (and that the term should be retired going forward). But all in all, with a little more breathing room at the front end and maybe a hint of the beginning of the unwind on the horizon, it was—all-in-all—a relatively good day.