As anticipated, the Federal Reserve's Federal Open Market Committee, which met March 17-18, indicates that it may no longer be "patient" in its stance toward normalizing interest rate policy, leading many to speculate that it is one step closer to raising rates. The FOMC hints that it is "unlikely" that the Federal Funds Rate will go up at the April meeting, it made no other predictions beyond April and wouldn't rule out a rate hike in June. The FOMC statement says, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
It continues, "Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range."
Further, "When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
In a press conference after the FOMC meeting, Chair Janet Yellen elaborated on the committee's stance. "Today's modification of our guidance should not be interpreted to mean that we have decided on the timing of that increase," she said. "In other words, just because we removed the word patient from the statement doesn't mean we are going to be impatient." Yellen also explained what the FOMC meant by patient. "In December and January the committee judged that it could be patient in beginning to normalize the stance of monetary policy. That meant that we considered it unlikely that economic conditions would warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. While it's still the case that we consider it unlikely that economic conditions will warrant an increase in the target range at the April meeting, such an increase could be warranted at any later meeting depending on how the economy evolves. This change does not mean that an increase will necessarily occur in June although we can't rule that out."
She also said that most participants had lowered their compared with the projections for the path of the Federal Funds Rate consistent with the downward revisions made to the projections for GDP growth and inflation. "The median projection for the Fed Funds Rate is just below 2% in the late 2016 and rises a bit above 3% in late 2017," Yellen said. "The median projected rate in 2017 remains below the 3.75% or so projected by most participants as the rate's longer run value." An examination of the Fed's "dot plot"" shows that the median rate is 0.77% at the end of 2015, 2.02% at the end of 2016, and 2.99% at the end of 2017.
RBC Capital Markets' Michael Cloherty writes, "The dots moved down significantly more than the market rallied since December. But after this market rally, the gap between the market and the dots remains extremely wide.... While the dots now signal a median and a mode of a 75bp IOER at the end of 2015, Fed funds suggests an IOER of about 65bps. For 2016, the median is consistent with a 2% IOER and the mode is consistent with a 1.75% IOER, while the market is suggesting roughly a 1 1/2% IOER. That is a tighter gap than we had before, but it is still a meaningful gulf. And for 2017, the median is consistent with a 3 1/4% target with the mode at a 3.25% target versus roughly 2% (or lower, depending on your term premium assumption) for the market. For the long run, the gap is wider than it was in Jan, as the market has fallen and the dots haven't moved much."
In other news, SEC Commissioner `Michael Piwowar was the keynote speaker at the ICI's "2015 Mutual Funds and Investment Management Conference" Monday, where he hit back at bank regulators and discussed hot topics in the fixed income and money market spaces. On the potential regulation of shadow banks, he said, "Notwithstanding the dire supposed need to have regulatory authority in the so-called "shadow banking" area, the track record of prudential regulators in identifying and acting upon systemic risks in the banking sector leaves much to be desired. Prior to 2008, prudential regulators allowed many large banks to become heavily reliant on very short-term borrowing, at relatively low rates, to fund lending and other operations. As the Fed has acknowledged, "[g]overnment agencies, including the Fed, failed to recognize the extent of the risks or how severely they could damage the financial system and the economy."
Also, on the temporary suspension of redemptions, he added, "In the immediate aftermath of the Reserve Primary Fund failing to maintain a $1 stable net asset value, the Commission adopted a temporary, then a permanent, rule under Section 22(e) that permits a money market fund to suspend redemptions during liquidation. In the June 2009 proposing release on money market funds, we asked whether such relief should be broadened to apply to all mutual funds. Although the Commission did not address that issue in the February 2010 adopting release, a number of commenters addressed the question."
ICI was live "tweeting" from the event and had just a few updates on money market fund related initiatives. One of their Tweets quotes from a panel featuring the SEC's Diane Blizzard: "We're planning on releasing some #MoneyMarketFund FAQs, to help with the latest round of regulatory reforms.... This should come out soon." ICI also Tweeted: "SEC realizes how much work enhanced reporting could be for funds" and "Other project is removal of credit-rating references from money market funds." (Follow @ICI and @cranedata on Twitter. Note: Crane Data normally "tweets" after updating our daily "News" and "Link of the Day" on www.cranedata.com.)
