German And Dutch Elections, And FOMC, BOE, And BOJ Meetings

The other plumbing issue is the continued drawdown of the Treasury's cash position with the Federal Reserve. As a result, fewer bills are issued, and funds with flexibility can shift and put downward pressure on other money market rates. The general collateral repo rate, for example, is so distorted (negative) that a bank is paid for lending Treasuries and taking cash.

Those who must invest in government bills are pressing yields lower and already yield less than 10 bps annualized out a year. There is a risk that the Fed responds by tweaking the interest on reserves (Note: the Fed pays interest on all reserves, not just excess reserves) or the reverse repo rate.

The Fed's stance on monetary policy proper has been well articulated and the statement will most likely be unanimously approved. The economy is far from reaching the Fed's targets; around 9.5 million jobs have been lost during the pandemic, and more people are filing weekly initial jobless claims than at the peak of the Great Financial Crisis.

The current settings, the Fed submits, are appropriate, and that includes the balance sheet expansion. The rise in yields is mostly a reflection of optimism about the future and that the resulting price pressures will likely be transitory. 

The pace of the move did receive attention. The 10-year yield has risen by around 72 bps so far this quarter. It is the fifth-largest quarter since 1995. From the end of January through March 12, the 10-year yield rose six consecutive weeks from around 1.06% to 1.64% at the end of last week. With headline CPI at 1.7% in February, ad real growth anticipated to be more than three-times stronger, a 10-year yield of 1.6% cannot be considered high. In the last quarter before the pandemic, the 10-year yield averaged almost 1.80%.

The Fed could be protesting the rise in rates more if it wanted. The fact that it hasn't seemed to reduce the risks that it will introduce yield curve control or some version of "Operation Twist." The Fed might have preferred a more gradual pace, but it is likely not disturbed by the move's magnitude.

On the one hand, with the economy set to boom with the fiscal stimulus and vaccine, some argue that Fed ought to be tapering. On the other hand, some critics want it to take stronger action to "quell investor nerves," as one journalist put it. Powell's answer was clear and unequivocal. The bond purchases do not target an interest rate but financial conditions more broadly, which is the same essential point ECB President Lagarde made at the press conference.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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