This was a light week for U.S. data, dominated by the release of the minutes of the June 17/18 Federal Open Market Committee meeting. There are several important components of the minutes that shed some light on a still-murky Federal Reserve exit strategy.
In June, the FOMC discussed the role that the rate of interest on excess reserves (IOER) should play. Participants agreed that it should play a central role in policy normalization. It was generally agreed that the interest rate on overnight reverse repurchase agreements (ONRRP) would be set below the IOER rate, to provide a floor under money market interest rates. The appropriate spread between IOER and ONRPP was also discussed, with a consensus view of near or above 20 basis points.
Most participants thought that the fed funds rate should continue to play a role in the Federal Reserve’s operations and communication strategy. There may, however, be a change in the way that the fed funds rate is calculated, possibly affecting other interest rates linked to the fed funds rate. The FOMC is concerned that there will be consequences, potentially unintended, and by implication, unforeseen, in an expanded ONRRP facility.
The FOMC also discussed the appropriate time to change its current policy of rolling over maturing assets on its balance sheet. It appears likely that the program will continue after interest rate liftoff.
In its economic assessment, the minutes show that the FOMC is assuming a GDP bounce-back following the weak first quarter, implying that the weak first quarter did not significantly alter the trajectory of monetary policy. The committee also noted that tight credit supply was restricting housing markets. This suggests that the Federal Reserve is supportive of relaxing credit standards for residential mortgages.
It now appears likely that the FOMC will vote to eliminate its active asset purchase program at the end of this coming October. Also, the central tendency of the cluster diagram showing FOMC members’ assessment of the appropriate target rate for fed funds at the end of 2015 has shifted up slightly. This implies a slightly earlier start to interest rate lift-off. We have moved up our expectation for lift-off to 2015Q2.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-11-14.