The FOMC didn't budge on policy or alleviate pressure in the overnight market.
The Federal Reserve reiterated today it has not seen enough progress to alter monetary policy. That may be true on the macroeconomic front, but we feel it should have addressed its overnight operations.
The statement from the Federal Open Market Committee (FOMC) meeting acknowledged the U.S. economy continues to strengthen, with Chair Jerome Powell crediting the better-than-expected vaccination progress for the accelerating pace of recovery. But that was a nod at best, as he again cited the desire to see substantial progress toward its employment and inflation goals before even thinking about material changes to policy. This was expected because, even with concerns about inflation, the case for action isn’t there.
But we argue that the case has been made for the Fed to change its administered rates on overnight trading, which also did not come to pass. The minutes to the March FOMC meeting revealed policymakers stood ready to adjust the rate on the New York Fed’s Reverse Repo Facility and the interest paid on excess reserves (IOER) if the broad money markets were to continue to fall under pressure. In response to a question during the press conference about this, Powell simply said the fed funds rate has remained well within the established target. While the Fed expects further stress there in the near future, it did not see a need to make a change at this time.
Yet near-zero rates on repurchase agreements and short-term Treasuries, downward pressure on unsecured rates outside of the fed funds market and growing participant dependence on the reverse repo facility are all signs of a market struggling with the effects of technical forces. We think the Fed eventually will take steps to alleviate the strains at the front end of the yield curve through an adjustment but will have to wait longer.