Highlights of Latest FOMC Minutes
The most recent "Minutes of the Federal Open Market Committee" explain, "Market participants interpreted incoming data as pointing to moderating inflation risks. Against this backdrop, market participants judged that the FOMC would likely slow the pace of rate increases further at the current meeting, and respondents to the Desk's Survey of Primary Dealers and Survey of Market Participants widely expected the Committee to implement a 1/4 percentage point increase in the target range for the federal funds rate. Survey respondents assessed that uncertainty around the likely peak level of the policy rate narrowed relative to the comparable results from the December surveys and, on average, placed significant probability on a target federal funds rate range close to 5 percent. A significant share of survey respondents anticipated that the Committee would hold the policy rate stable for much of 2023." They continue, "The manager pro tem turned next to a discussion of money markets and Federal Reserve operations. Money market rates were stable over the period, with the year-end passing smoothly. As expected, balances in the overnight reverse repurchase agreement (ON RRP) facility increased at year-end but quickly retraced. Market participants generally expected usage of the ON RRP facility to continue a downward trend in 2023, moderating the decline in reserve balances as the Federal Reserve's holdings of securities continue to run off. Should transitory pressures occur in money markets over the course of the year, the manager pro tem noted that the standing repurchase agreement (repo) facility and discount window would be available to help support effective monetary policy implementation. The manager noted that, over coming months, developments affecting the Treasury General Account (TGA) and Treasury financing could influence money market conditions. An increase in TGA balances associated with April individual tax receipts could result in a temporary decline in reserve balances. In subsequent months, uncertainties associated with the debt limit could also be important. In particular, the Treasury could increase bill issuance to rebuild TGA balances once the debt limit is lifted, reducing reserves and potentially lifting money market rates. The manager pro tem noted that in recent months, investors in the ON RRP facility had responded to small increases in money market rates by shifting balances into private investments, and that reductions in ON RRP volumes may help smooth adjustments in money markets." The FOMC adds, "Conditions in short-term funding markets remained stable over the intermeeting period, with the December increase in the target range for the federal funds rate and the associated increases in the Federal Reserve's administered rates passing through quickly to overnight money market rates. In secured markets, repo rates were roughly the same as the ON RRP offering rate but continued to occasionally print slightly higher around days with Treasury bill and coupon settlements. Daily take-up in the ON RRP facility remained elevated, reflecting continued elevated assets under management (AUM) for money market mutual funds (MMFs), ongoing uncertainty around the policy path, and limited supply of alternative investments such as Treasury bills. Net yields on MMFs rose further over the intermeeting period, mostly passing through the increase in administered rates. Bank deposit rates gradually increased but continued to lag cumulative increases in the federal funds rate.... Vulnerabilities associated with funding risks were characterized as moderate. The rising rate environment has prompted inflows into prime retail MMFs, while AUM at prime institutional funds, which have proved more sensitive to turmoil in the past, have grown much less. Assets in open-end mutual funds that invest in less liquid instruments like bank loans or high-yield corporate bonds have declined notably over the past year. In response to vulnerabilities at MMFs and open-end mutual funds, the Securities and Exchange Commission has proposed rules to make these funds more resilient."
