FOMC Meeting Preview and Street Views – Policy remains in a ‘good place’ though an IOER ‘tweak’ may be in store

28 January 2020

FOMC: At 14:00NY/18:00LDN – Rate decision and statement release. No updated SEPs or ‘dots’. Chair Powell’s press conference will begin at 14:30EST/19:30GMT. In Brief -target range to be left unchanged at 1.50-1.75 in a unanimous decision -no SEPs so any change in forward guidance will come from statement/press conference -no major changes to forward guidance expected, Powell likely to repeat policy in a good place with future policy action data-dependent -Analysts views are split on the potential for a +5bp hike to RRP/IOER; market pricing >50% chance of a hike -No changes to repo or balance sheet policy though will look for guidance in Powell’s press conference and/or the separate implementation note. Summary: This week’s FOMC meeting is expected to be somewhat uneventful with the Fed leaving the target range unchanged at 1.50-1.75% in a unanimous vote. No updated SEPs at this meeting and any changes to forward guidance within the statement are likely to be minimal. The minutes from the December meeting and recent Fed speakers reaffirmed that policy is "likely to remain appropriate for a time" unless "developments emerged that led to a material reassessment of the outlook.” Powell will likely stick with this messaging in the post meeting press conference. What they choose to do with the RRP and IOER may provide some excitement and views on a potential upward adjustment remain. When EFFR set at 1.54%, below IOER for five consecutive sessions starting on Jan 10th, many analysts pulled forward their calls for the Fed to adjust IOER higher by 5bps to prevent the FFs rate falling further towards the bottom of the target range. Analysts views are split on this, with a slight majority expecting the Fed will in fact pull the trigger at this meeting, raising IOER to 1.60% from 1.55% currently . It is unclear if the recent China/coronavirus uncertainty will impact their decision-making process, with some now expecting the Fed will be patient, potentially waiting until the March meeting before tweaking IOER. The market however continues to assign a >50% chance of a hike with Jan OIS trading 1.578%. -Other things to watch out for will be updates to their balance sheet policy. Tbill purchases or ‘reserve management’ operations are ongoing at $60b/month. Operations were announced on Oct 11th and brought aggregate reserve balances up to roughly $1.61tn as of last week, roughly $220bn above their $1.39tn trough in mid-September There is no specific end date for the Tbill purchases but they are expected continue at least through April/May. There may be a taper period prior to the end so we will look for any guidance on that tomorrow. Updates to reserve management/balance sheet policy may be delivered in the Implementation Note, released the same time as the statement . Other potential topics for the press conference: -The Debate over whether these reserve management operations (TBill purchases) constitute QE have heated up recently. There will also be questions about whether the purchases and growing Fed balance sheet may be fueling the recent gains in asset prices, creating financial stability issues as were commented on by the Fed’s Kaplan. The S&P is still up ~3.5% since the December meeting despite the recent weakness and +10% since the Fed announced the bill purchases to bolster reserves in the wake of the September repo spike. Kaplan, a voter this year, expressed concerns about the impact the balance sheet growth was having on asset prices. In an interview with BB TV earlier in the month, he acknowledged recent liquidity provisions were “contributing to elevated risk-asset valuations.” He added these operations were in fact “a derivative of QE when we buy bills and we inject more liquidity; it affects risk assets. This is why I say growth in the balance sheet is not free. There is a cost to it.” “I think we’ve done what we need to do up until now. But I think it’s very important that we come up with a plan and communicate a plan for winding this down and tempering balance sheet growth.” -Topics such as balance sheet and more permanent solutions to recent funding volatility such as a standing repo facility will be discussed at the meeting though we may need to wait for the minutes for further details