FOMC Dominates Week Ahead Calendar

The last FOMC meeting of 2018 is at hand. After hiking rates three times in 2017, the Fed signaled that four hikes were likely this year and with a widely expected move on December 20, it would have fully delivered, though many steps along the way, skeptical investors had to be led by the nose, as it were, to minimize the element of surprise.  

The famous dot plot of the Summary of Economic Projections has long shown that most Fed officials anticipated only three rate increases in 2019. This clearly implies moderation from the quarterly pace of hikes this year. This is not news. 

Before April 2011, the Federal Reserve did not hold regular press conferences. This was more than two decades after William Grieder's tome, The Secrets of the Temple, which captured and cast light on what was a fairly secretive institution. A combination of the Great Financial Crisis, the policy response, and the personalities at the Fed at the time led to Bernanke holding informal and then formal press conferences. Yellen maintained the pattern of holding press conferences at meetings at which the forecasts were updated. Rates have only been changed at meetings that are followed by press conferences. Yellen suggested that the Fed could and would call a press conference if it decided to change rates and none had been pre-scheduled. This never seemed particularly practical and never took place.  

The Fed holds eight meetings a year. The forecasts are updated once a quarter. The Fed hiked in December 2015 and December 2016, before hiking rates three times in 2017. With only four press conferences a year, the Fed was limiting its degrees of freedom unnecessarily. As the Fed increased the pace of hikes, some greater latitude was advantageous. Going forward, the Fed Chair will hold a press conference after every meeting. The fewer anticipated rate increases implied a moderation in the pace, and the increased frequency of press conferences, imply greater flexibility. 

What is new is when the market thinks the Fed will pause. The market never has accepted that the Fed would hike rates three times in 2019, but since November 8 through the middle of last week, the implied yield of the January 2020 fed funds futures contract ( a good read into expectations for the end of 2019) tumbled 44 bp to 2.515%. Recall that the contract settles at the average effective fed funds rate (weighted by volume) which recently is about 2.20%.  

The effective rate was initially around the middle of the target range, but in recent months is firmed to the upper end. The top end of the range is the rate at which the Fed pays for reserves. Although the Fed refers this as IOER, interest on excess reserves, the fact of the matter, which is often obscured, is the Fed pays interest on required reserves as well. In any event, to reinforce the cap, in September, the Fed only raised interest on reserves by 20 bp, while hiking the range by 25 bp 

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Read more by Marc on his site Marc to Market.

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