Fed Holds; Cloherty on RRP Cap
The Federal Reserve released the Statement from its June 14-15 FOMC meeting, and, as expected, didn't raise interest rates. It says, "Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.... Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.... 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.... The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run." In her press conference, Fed Chair Janet Yellen discussed the revised dot plot, saying, "The median projection for the Federal Funds Rate rises only gradually to one and a half percent at the end of next year and two and a half percent by the end of 2018.... Although the median Federal Funds Rate at the end of this year is unchanged from March (0.9%), a number of participants revised down their projections." In other news, RBC Capital Markets strategist Michael Cloherty recently discussed the Fed's RRP cap. He writes, "At one of the next three FOMC meetings, we expect the Fed to reimpose a cap on the RRP (the $300bn cap was removed on the first rate hike). We think July is most likely, but there is an outside chance we see this tomorrow (in the implementation note part of the statement). This would not be a big deal as long as the decline in the cap size remains large through MMF reform in October. Usage has fallen below $50bn over the past week. But as Prime funds hoard liquidity to be sure they can meet any redemptions in front of the Oct 14th regulatory changes, they are unlikely to find enough private assets and will need to move into the RRP. But as long as the cap is large enough on Oct 14th, it doesn't matter whether the cap comes back in June, July, September, or another month. That said, we expect there to be a lot of teeth-gnashing by investors who are worried that the RRP might disappear altogether, loosening the floor on rates. We see no reason for concern -- the Fed will need a sizable RRP if it wants to retain operational control over money market rates."
