Fed Minutes: Policy Firming Near
The Federal Reserve released the Minutes from its July 28-29 FOMC meeting yesterday. The minutes say, "The staff next summarized some of the recent steps the System had taken to prepare further for the process of normalization of monetary policy. The staff also proposed that future changes in the FOMC's target federal funds rate range as well as associated changes in related administered interest rates -- including the interest rates on excess and required reserves, the ON RRP rate, and the primary credit rate -- all be effective on the day after the Committee's policy decision. Making all such rate changes effective on the same day would enhance the clarity of Federal Reserve communications. It would also help promote federal funds trading within the new target range, partly by enabling the Desk to conduct ON RRP operations at the new rate specified by the Committee on the same day that the new target range becomes effective. Participants supported the staff proposal.... During their discussion of economic conditions and monetary policy, participants mentioned a number of considerations associated with the timing and pace of policy normalization. Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point. Participants observed that the labor market had improved notably since early this year, but many saw scope for some further improvement. Many participants indicated that their outlook for sustained economic growth and further improvement in labor markets was key in supporting their expectation that inflation would move up to the Committee's 2 percent objective, and that they would be looking for evidence that the economic outlook was evolving as they anticipated. However, some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the Committee for initiating a firming of policy." In other news, Barclays' strategist Joseph Abate said in his last "US Weekly Money Market Update," "Earlier this week, the effective fed funds rate moved to 15bp -- its highest sustained level since April 2013. This back-up has widened the spread between the effective fed funds rate and the Fed's overnight RRP to 10bp and has raised questions about where the effective rate will settle at lift-off.... Indeed, it is probably not coincidental that the jump the fed funds rate has occurred at the same time that Treasury GCF repo rates have also cheapened. So far this month, the Treasury GCF repo rate has averaged 26bp (compared with 18bp and 19bp in June and July, respectively, and excluding month-ends). We think there are two potential explanations for the increase in repo rates: the G-SIB capital surcharge and the absence of a significant short-base in the Treasury market."
