Fed Minutes on Rates, RRP, Rise
The latest "Minutes of the Federal Open Market Committee" state, "Regarding monetary policy expectations, the manager observed that market participants and respondents to the Open Market Desk Survey of Market Expectations (Desk survey) generally expected no change in the target range of the federal funds rate at the June FOMC meeting. Market- and survey-based measures of expected policy rates moved higher over the intermeeting period. In the Desk survey, the median of the modal paths of the federal funds rate implied no changes in the target range through the beginning of 2027 and one rate cut in the second quarter of next year. Market pricing suggested that one rate hike was priced for mid-2027, but the manager noted that these measures were likely boosted, in part, by term premiums." They also tell us, "The manager observed that money market conditions were generally stable, although conditions softened notably early in the intermeeting period before they partially rebounded. In particular, repurchase agreement (repo) rates dropped to 15 basis points below the interest rate on reserve balances in mid-May. Consistent with that drop, the effective federal funds rate declined 2 basis points, the first such change since November. There was modest take-up of the Federal Reserve's overnight reverse repurchase agreement operations on days when repo rates were especially low, confirming that those operations were effective in firming the floor under money market rates. Regarding the decline in repo rates early in the period, the manager noted several likely driving factors: Reserves increased following the seasonal low around the April tax date as the Treasury General Account dropped, reserve management purchases added reserves and reduced the bill supply available to the public, U.S. global systemically important banks likely increased intermediation capacity in response to regulatory changes earlier in the year, the demand for repo financing on the part of levered investors declined, and seasonal increases in cash investments of government-sponsored enterprises coincided with the lowest rates seen over the intermeeting period. The manager noted that, these developments notwithstanding, the level of reserves in the system appeared to remain within a range consistent with an ample supply." The Minutes say, "Over the intermeeting period, the market-implied expected path of the federal funds rate and nominal Treasury yields moved higher as stronger-than-expected economic data reinforced expectations that economic activity would remain resilient. The market-implied path of the policy rate over the latter half of this year increased during the intermeeting period, and related measures of uncertainty about the path of policy rose, partly reflecting a higher term premium. The rise in nominal Treasury yields, most notable at shorter maturities, reflected higher real rates. Short-term market-based measures of inflation compensation declined significantly but stayed at a slightly elevated level. Market-based measures of longer-term inflation compensation and survey-based measures of inflation expectations remained well anchored." They add, "Conditions in U.S. short-term funding markets remained stable. Aggregate bank reserves moved up following the previous period's tax receipt–driven decline. Money market rates ended the period slightly lower, on net, amid continued low bill supply. In support of the Committee's dual-mandate goals, all members agreed to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent and to reaffirm the FOMC's policy of maintaining ample reserves in the banking system. Members also agreed that the statement would not repeat the language that had suggested an easing bias regarding the likely direction of the Committee's future interest rate decisions. Members noted that there had been little change in the unemployment rate and solid growth in economic activity, but that inflation remained elevated relative to the Committee's 2 percent goal. Against this backdrop, members concurred that the post-meeting statement would convey the Committee's commitment to achieving its dual-mandate goals and emphasize that the Committee will deliver price stability."
