WASHINGTON–Minutes released by the Federal Reserve from the mid-March meeting of its Open Market Committee indicate projections for rate increases have been dialed back a bit.
“Since the January meeting, the date of the first increase in the target range for the federal funds rate implied by a straight read of market pricing moved notably earlier to the first quarter of 2023, and the implied target rate at the end of 2023 rose around 50 basis points,” the Fed minutes state. “However, responses to the Open Market Desk surveys suggested more modest changes to policy rate expectations. The probability-weighted mean survey expectation for the target rate at the end of 2023 rose only around five basis points.”
The minutes note that in the United States, the trend toward higher longer-term yields observed in recent months accelerated over the intermeeting period, and far-forward real rates based on Treasury Inflation-Protected Securities (TIPS) rose considerably.
“Market participants highlighted an improving economic outlook, bolstered by passage of the American Rescue Plan (ARP) and progress on vaccinations, as underlying the increase in yields,” the minutes state. “Model- and survey-based estimates suggested that a significant portion of the increase in yields was associated with an increase in term premiums. Higher term premiums could reflect the outlook for more expansive fiscal policy and an associated upward revision in the expected path for Treasury debt outstanding. Increased uncertainty over the outlook for longer-term interest rates as well as technical factors may also have contributed to the rise in term premiums.”
The Fed further noted Rates implied by interest rate futures maturing over the next several years rose notably over the intermeeting period, reportedly reflecting a reassessment by market participants of the expected path of the target range for the federal funds rate.
NAFCU offered its take on the minutes.
“The FOMC is attuned to the building economic optimism, but the majority of the committee appears committed to holding rates at zero through 2023,” said NAFCU Chief Economist and Vice President of Research Curt Long.
Economic Forecast
Expectations for economic conditions at the time of the first increase in the target range, as measured by the Desk surveys, appeared to remain broadly consistent with the Committee's policy framework and forward guidance, the Fed added.
Expectations from the Desk surveys for the path of asset purchases were little changed. Contacts noted that these expectations have been held steady by policymaker communications emphasizing both the need to see realized progress toward the Committee's goals and the intent to communicate well in advance of the time when progress could be judged substantial enough to warrant a change in the pace of purchases, the FOMC minutes state.
Reserve Balances Rise
The Federal Reserve reported its reserve balances rose more than $400 billion, on net, over the intermeeting period to $3.7 trillion, while Treasury bills outstanding decreased more than $200 billion.
“Against this backdrop, the effective federal funds rate softened modestly, while repurchase agreement (repo) rates declined to a greater extent,” the Fed stated. “Moreover, market participants projected that reserves would grow at a historically rapid pace in coming months, reflecting continued expansion of the Federal Reserve's balance sheet along with a projected drawdown in the balances maintained in the Treasury General Account.
“Market contacts suggested that continued rapid expansion of reserves could put further downward pressure on money market rates,” the minutes continue. “The deputy manager noted that the earliest and most pronounced pressure was likely to be observed in overnight secured financing markets, and there could be increasing usage of the overnight reverse repurchase agreement (ON RRP) facility.”
Responding to Pressure
Following the discussion, the minutes state the chairman noted the potential for downward pressure on money market rates and suggested that, should undue downward pressure on overnight rates emerge, “it might be appropriate to implement adjustments to administered rates at upcoming meetings or even between meetings to support effective policy implementation and ensure that the federal funds rate remains well within the target range.”
The full minutes and additional forecasts can be found here.