Minutes of the FOMC, July 25-26
The latest "Minutes of the Federal Open Market Committee July 25-26, 2023" state, "There was a strong anticipation, evident in both market-based measures and responses to the Desk's surveys, that the Committee would raise the target range 25 basis points at the July FOMC meeting. Most survey respondents had a modal expectation that a July rate hike would be the last of this tightening cycle, although most respondents also perceived that additional monetary policy tightening after the July FOMC meeting was possible. As inferred from their responses, survey respondents expected real rates to increase through the first half of 2024 and to remain above their expectations for the long-run neutral levels for a few years.... The manager then turned to money market developments and policy implementation. The overnight reverse repurchase agreement (ON RRP) facility continued to work as intended over the intermeeting period and had been instrumental in providing an effective floor under the federal funds rate and supporting other money market rates; those rates remained stable over the period. Following the suspension of the debt ceiling in early June, the Treasury Department issued securities, notably Treasury bills, to replenish the Treasury General Account (TGA). The resulting greater availability of Treasury bills, which were priced at rates slightly above the current and expected ON RRP rates, induced a net decline in ON RRP balances for the period. A further decline in ON RRP balances was deemed probable amid sustained projected Treasury bill issuance, further reductions in the size of the Federal Reserve's balance sheet in accordance with the previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet, and a possible further reduction in policy uncertainty that could incentivize money funds to extend the duration of their portfolios. In the July Desk Survey of Primary Dealers, respondents expected lower ON RRP balances and higher bank reserves by the end of the year, compared with the June survey." The FOMC comments, "Over the intermeeting period, the market-implied path for the federal funds rate rose modestly, while the timing of the path's slightly higher peak moved a little later, to just after the November meeting. Beyond this year, the policy rate path implied by overnight index swap (OIS) quotes ended the period modestly higher. Yields on Treasury securities increased modestly at shorter maturities but only a bit at longer maturities. Measures of inflation compensation rose only slightly for near-term and longer maturities. Measures of uncertainty about the path of the policy rate derived from interest rate options remained very elevated by historical standards." The Minutes add, "Conditions in domestic short-term funding markets remained generally stable over the intermeeting period. Spreads in unsecured markets narrowed modestly amid slight increases in OIS rates. Following the suspension of the debt limit, the Treasury Department partly replenished the TGA via a large net increase in bill issuance. Auctions of Treasury bills were met with robust demand, as shorter-term bill yields increased relative to other money market rates. Money market funds increased their holdings of Treasury bills and reduced their investments with the ON RRP facility. ON RRP take-up declined notably -- about $390 billion -- over the intermeeting period, reflecting more attractive rates on some alternatives to investing in the ON RRP facility. Despite reduced ON RRP take-up, money funds maintained relatively high asset allocations in overnight repurchase agreement investments amid still-elevated uncertainty about the future path of policy."
