Unless you’ve been taking a well-deserved vacation, you are well aware that there is a Federal Open Market Committee (FOMC) meeting this afternoon.  General news programming has been understandably focused on the summit meeting between Presidents Biden and Putin, but financial news has spent much more time discussing the potential ramifications of today’s Fed meeting upon financial markets. 

In a video posted yesterday, I discussed the questions that I would ask Chairman Powell if I were invited to the post-meeting press conference.  While many questions will be raised if there are changes to the Fed’s “dot plot” (expectations by members about the levels of future rates), I would focus on how they explain the apparent conundrum of adding liquidity through bond purchases while simultaneously removing it via daily reverse repos.   I offered the analogy of filling a pool with a hose on one end while preventing it from overflowing with a pump on the other.  The following chart shows how unprecedented the current levels of activity are:

Net Overnight Repo Activity at the New York Federal Reserve Bank, 5 Years Daily

Source: Bloomberg

Over the past five years, we saw some large spikes, but those coincided with quarter ends.  It is understandable why banks may turn to the Federal Reserve as a depositor of last resort before the end of the quarter.  If banks are collectively trying to minimize their excess cash ahead of a quarter or year-end, the only institution willing to take that cash would be the Fed.  It occurred regularly in 2016-17, and we saw a big spike at the end of March 2020.  At that time, the Fed had just begun flooding the system with money in response to the Covid crisis, so it was understandable that banks might not have been able to use it productively before the quarter ended. 

The question that I would like to see addressed is why the current level of reverse repo activity has routinely grown to levels that would normally be explained by temporary calendar effects.  This quarter doesn’t end for another two weeks.  While we did see a fall yesterday, it is entirely possible that this level of reverse repo activity could be sustained or grow into this quarter-end.

As a trader at heart, I would like to display the market’s moves in the wake of the past few FOMC meetings.  In each case, I use the 3 day period that includes the meeting and the subsequent two days (except when the meeting was on a Thursday).  It is hard to discern a foolproof pattern, but we can acknowledge that there have been periods with high volatility.   I’ll present the table with the results first, but I encourage you to look at each individual chart.  Some of them show more volatility than the simple 3-day change.

We see that even in the face of a relentlessly rising market, FOMC meetings were usually greeted by declines.  Traders were somehow disappointed in what they heard. Either expectations were too high in advance of the meeting, or the Chairman made unfavorable comments in the press conference.  I pay particular attention to the March 2021 and September 2020 meetings.  Like now, they are occurring in the days ahead of a quarterly expiration.  Remember also that there were 2 FOMC meetings in March 2020.  The first was a regularly scheduled meeting when the Fed Funds target was lowered from 1.5-1.75% to 1-1.25%; the second was an emergency meeting with the rate target cut to the current 0.25%

S&P 500 Index 3 Day Movement, April 28-30, 2021

Source: Bloomberg

S&P 500 Index 3 Day Movement, March 17-19, 2021

Source: Bloomberg

S&P 500 Index 3 Day Movement, January 27-29, 2021

Source: Bloomberg

S&P 500 Index 2 Day Movement, November 5-6, 2020

Source: Bloomberg

S&P 500 Index 3 Day Movement, September 16-18, 2020

Source: Bloomberg

S&P 500 Index 3 Day Movement, July 29-31, 2020

Source: Bloomberg

S&P 500 Index 3 Day Movement, June 10-12, 2020

Source: Bloomberg

S&P 500 Index 3 Day Movement, April 29 – May 1, 2020

Source: Bloomberg

S&P 500 Index 2 Day Movement, March 16-17, 2020

Source: Bloomberg

S&P 500 Index 3 Day Movement, March 3-5, 2020

Source: Bloomberg