EconoFACTS

May 19, 2021 | 15:30

Minutes of April 27-28 FOMC Meeting

Economist

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael Gregory is Deputy Chief Economist and Head of U.S. Economics for BMO Capital Markets. He manages the tea... (Read more)

Michael Gregory , CFA

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael Gregory is Deputy Chief Economist and Head of U.S. Economics for BMO Capital Markets. He manages the tea... (Read more)

Amid the April 27-28 meeting, the FOMC didn’t change the fed funds target range or the pace of asset purchases, and the forward guidance on both policy tools remained the same. The policy statement also acknowledged the “strengthened” state of the economy, owing to “progress on vaccinations and strong policy support”, along with higher inflation readings “largely reflecting transitory factors”. However, the assessment of the (net downside) risks to the economic outlook were no longer deemed to be “considerable”. Meanwhile, the interest rate on excess reverses (IOER) and the overnight reverse repo rate (ON RRP) were left unchanged at 0.10% and 0.00%, respectively, despite pre-meeting speculation they could be lifted to address the relatively low levels of overnight money market rates.

The Minutes delivered some insights into these developments or lack thereof.

On QE forward guidance: Monthly purchases of at least $80 billion Treasuries and $40 billion MBS will be continued until “substantial further progress” toward the employment and inflation goals has been made. The Minutes said: “Various participants noted that it would likely be some time until the economy had made substantial further progress”, consistent with previous messaging. However, a “number” of participants suggested that “it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases” if the economy continued along its current track.

On inflation being transitory: The factors cited in the Minutes were base effects, higher oil prices and the “expected surge in demand as the economy reopens further, along with some transitory supply chain bottlenecks”. They also mentioned: "After the transitory effects of these factors fade, participants generally expected measured inflation to ease”. However, “a number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year”.

On the altered risk assessment: Members agreed to drop the characterization of risks as "considerable" because “continued progress on vaccinations and accommodative monetary and fiscal policies most likely would underpin further gains in economic activity and employment and would limit risks to the outlook”.

On IOER and ON RRP rates: The manager of the system open market account commented that "downward pressure on overnight rates in coming months could result in conditions that warrant consideration of a modest adjustment to administered rates”. The manager was referring to continued reduced Treasury bill supply and strengthened demand for safe, short-term investment vehicles.

At the meeting, there was also a briefing on making the Fed’s repo operations with primary dealers, those conducted since September 2019 when reserves started being scarce, and the Foreign and International Monetary Authorities (FIMA) Repo Facility, established in March 2020, permanent standing facilities. The discussion revealed general support for this happening (benefits outweighing the costs).

Bottom line: The Minutes support the view that the Fed is not expected to make any policy changes anytime soon (technical adjustments aside).