Fed Publishes Minutes from June 14-15
The latest "Minutes of the Federal Open Market Committee, June 14–15, 2022," discuss "Developments in Financial Markets and Open Market Operations." They comment, "The manager of the System Open Market Account (SOMA) turned first to a discussion of financial developments. Over the intermeeting period, there were significant swings in asset prices, and financial conditions tightened, on net, as market participants assessed incoming information about the economy. In the United States, near-term policy rate expectations shifted markedly toward the end of the period, particularly after the release of the May consumer price index (CPI) report. Ahead of the release of the report, market expectations reflected a broad consensus that there would be 50 basis point rate increases at both the June and July FOMC meetings. After the release of the higher-than-expected inflation data, policy-sensitive rates pointed instead to a considerable probability of 75 basis point moves at both the June and July meetings. The market-implied path of the federal funds rate moved higher at longer horizons as well. Market participants noted elevated uncertainty about the economic and monetary policy outlook." The FOMC writes, "Across the yield curve, rates on nominal Treasury securities ended the period significantly higher, primarily reflecting the revision in the outlook for monetary policy and the associated rise in real yields <b:>~_. Market-based measures of inflation compensation continued to indicate expectations that inflation would decline notably in coming quarters, and measures of medium-term inflation compensation fell over the intermeeting period. Market participants reported that while liquidity conditions in the market for Treasury securities had been affected by the elevated volatility in rates and larger trades were having an increased effect on pricing, overall market functioning had held up. Responding to higher interest rates and some concerns about the growth outlook, equity prices moved substantially lower over the period." They tell us, "`Regarding money market developments, the manager noted that the 50 basis point increase in the target range at the May FOMC meeting passed through to the effective federal funds rate and was also transmitted to other overnight rates. The federal funds rate held steady at 83 basis points throughout the period, while the Secured Overnight Financing Rate softened, on net, falling to the bottom of the federal funds target range later in the period. Contacts attributed the downward pressure on secured rates to high liquidity levels and declining Treasury bill supply, as well as elevated uncertainty about the interest rate path, which had increased demand for short-term investments. In this environment, participation in the overnight reverse repurchase agreement (ON RRP) facility increased, and a greater share of activity in overnight private repurchase agreement (repo) markets was conducted by lenders who lacked access to the facility. The manager noted that, if ON RRP usage continued to rise, it may be appropriate at some point to consider further lifting the per-counterparty limit. Over the longer term, ON RRP usage was expected to fall, with the reduction in the size of the Federal Reserve's balance sheet resulting in a gradual rise in money market rates relative to the ON RRP rate." The Fed states, "Conditions in short-term funding markets remained stable over the intermeeting period, with the May increase in the Federal Reserve's administered rates passing through promptly to overnight money market rates. Spreads on longer-tenor commercial paper (CP) and negotiable certificates of deposit narrowed moderately, with no signs of spillovers beyond the stablecoin market following the collapse of a large algorithmic stablecoin. Indeed, CP outstanding increased slightly over the period. Money market fund (MMF) net yields across all fund types rose notably, as increases in administered rates passed through to money market instruments. Secured overnight rates softened significantly relative to the ON RRP offering rate since the May FOMC meeting, with the downward pressure on rates attributed to continuing declines in net Treasury bill issuance, elevated demand for collateral in the form of Treasury securities, and MMFs maintaining very short portfolio maturities amid uncertainty about the pace of anticipated policy rate increases. Consistent with the downward pressure on repo rates, daily take-up in the ON RRP facility increased further." Finally, the Minutes add, "In their consideration of the appropriate stance of monetary policy, participants concurred that the labor market was very tight, inflation was well above the Committee's 2 percent inflation objective, and the near-term inflation outlook had deteriorated since the time of the May meeting. Against this backdrop, almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 75 basis points at this meeting. One participant favored a 50 basis point increase in the target range at this meeting instead of 75 basis points. All participants judged that it was appropriate to continue the process of reducing the size of the Federal Reserve's balance sheet, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that the Committee issued in May. In light of elevated inflation pressures and signs of deterioration in some measures of inflation expectations, all participants reaffirmed their strong commitment to returning inflation to the Committee's 2 percent objective. Participants observed that a return of inflation to the 2 percent objective was necessary for creating conditions conducive to a sustainably strong labor market over time."
