Fed Minutes Discuss Hike, RRP, Stress
The Federal Reserve Board posted its "Minutes of the Federal Open Market Committee, March 15-16, 2022" yesterday, which tells us, "Market participants almost universally expected a 25 basis point increase in the target range for the federal funds rate at the current meeting. Moreover, futures prices implied that the federal funds rate would increase around 170 basis points through year-end, about 70 basis points more than had been priced in at the time of the January meeting. Similarly, the median projection of the target range for the federal funds rate in the Open Market Desk's most recent surveys of primary dealers and market participants showed an increase of 150 basis points this year. The median projected path for the target range beyond 2022 rose another 100 basis points by the first half of 2024 to a level modestly above the median projected longer-run level before returning closer to the longer-run level in 2025." The Minutes also explain, "Market participants expected the interest on reserve balances rate and overnight reverse repurchase agreement (ON RRP) offering rate to be increased by 25 basis points at the current meeting, in line with their expected increase in the target range, and anticipated that the changes would fully pass through to market overnight interest rates. There was uncertainty around how ON RRP usage might evolve in the near term as money market rates increased. If banks lifted their deposit rates by less than the increase in returns available on alternative investments, depositors could shift funds into these alternatives, leading to downward pressure on rates and increased ON RRP take-up. If instead deposit rates moved up in line with net yields on alternative investments, ON RRP takeup could remain relatively steady. Over the longer term, however, ON RRP balances were expected to decline as the Federal Reserve's balance sheet runoff proceeded and gradually lifted money market rates relative to the ON RRP rate." Finally, the Fed says, "Short-term funding markets were mostly stable over the intermeeting period, although spreads in some segments widened. The effective federal funds rate and the Secured Overnight Financing Rate generally held steady at 8 basis points and 5 basis points, respectively. Overnight rates on commercial paper (CP) across most sectors also held steady, although rates and spreads on longer-tenor CP and negotiable certificates of deposit increased amid the escalation of the Ukraine invasion. Spreads between three-month forward rate agreements and overnight index swaps widened as borrowers increased precautionary issuance of longer-tenor debt while money market investors preferred shorter-duration investments. ON RRP take-up was little changed, averaging about $1.6 trillion."
