FEDERAL RESERVE BANK & MONETARY POLICY
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key sources of information on FRB & MONETARY POLICY
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FEDERAL FUNDS RATE ACTIONS
Federal Reserve Bank Fed Funds Actions: The Fed has taken many actions on the fed funds rate since the peak of 5.25% during 2006 & 2007.
In September of 2007, the Fed lowered the fed funds rate by 25 bps and commenced a program to drive this interest rate toward zero. The Fed took ten actions from September 2007 to December 2008 to lower the fed funds effective rate to 0.25%.
The fed funds rate was held at 0.25% for 84 months to December 2015.
In December 2015, the Fed commenced its program to raise the fed funds rate to a more normalized level in a steady, disciplined manner.
Since December 2015, the Fed has increased the fed funds rate on nine more occasions to an effective rate of 2.50% currently, including the December hike of another 25 bps.
The Federal Reserve held fed funds rate unchanged at its June 2019 FOMC meetings.
No interest rate actions were taken at the July 30-31 meeting.
The next meeting of the FOMC where an interest rate decision is typically made would usually be at the September meeting on 9/17-18.
Federal Reserve Perspective on Monetary Policy:
Monetary Policy Report (7/5/2019): Interest Rate Policy: At the June FOMC meeting, however, the Committee noted that uncertainties about the global and domestic economic outlook had increased. In light of these uncertainties and muted inflation pressures, the Committee indicated that it will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective. In the most recent Summary of Economic Projections, which was compiled at the time of the June FOMC meeting, participants generally revised down their individual assessments of the appropriate path for monetary policy relative to their assessments at the time of the March meeting. However, as the Committee has continued to emphasize, the timing and size of future adjustments to the target range for the federal funds rate will depend on the Committee’s assessment of realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.
FOMC Federal Funds Projections: About half of participants expected that the evolution of the economy, relative to their objectives of maximum employment and 2 percent inflation, would likely warrant keeping the federal funds rate at its current level through the end of 2019; the same number projected that a lower level for the federal funds rate would be appropriate by year-end. The medians of participants’ assessments of the appropriate level of the federal funds rate in 2020 and 2021 were close to the median of their assessments of the longer-run federal funds rate level. Nearly all participants lowered their projections for the appropriate level of the federal funds rate, relative to March, at some point in the forecast period. Although nearly half of the participants revised their projections for 2019 to levels 25 basis points or 50 basis points below the current level, the median projection for the federal funds rate for the end of 2019 was unchanged. The medians for the federal funds rate for 2020 and 2021 were 50 basis points and 25 basis points lower than in March, respectively.
Since the September 2018 FOMC meeting, the Fed has altered its view on the economy and on the pace of fed funds rate hikes: from three (3) hikes to two (2) hikes to zero (0) hikes for 2019. And, as of the June meeting, the uncertainty in the global and domestic economies are creating potential for a rate hike in 2019.
2018 Fed Funds Actions: The Federal Reserve has raised the federal funds rate:
March 2018 25 bps
June 2018 25 bps
September 2018 25 bps
December 2018 25 bps
2019 Fed Funds Actions: The Federal Reserve is expected to make a decision on the federal funds rate during the following meetings:
March 2019 0 bps
June 2019 0 bps
September 2019 XX bps?
December 2019 XX bps
FEDERAL RESERVE - QUANTITATIVE EASING
AND BALANCE SHEET NORMALIZATION ACTIVITY
Statement Regarding Reinvestment in Treasury Securities and Agency Mortgage-Backed Securities (March 20, 2019)
On March 20, 2019, the Federal Open Market Committee (FOMC) provided additional information regarding plans for its securities holdings via its Balance Sheet Normalization Principles and Plans. Specifically, the Committee intends to slow the reduction of the Federal Reserve’s holdings of Treasury securities by lowering the cap on monthly Treasury redemptions beginning in May. The Desk will continue to reinvest each month’s principal payments from Treasury securities, agency debt, and agency mortgage-backed securities (MBS) only to the extent that such payments exceed the corresponding monthly cap amounts. Additionally, starting in October, the first $20 billion per month of any agency principal payments received will be reinvested in Treasury securities; any additional agency principal payments above $20 billion will be reinvested in agency MBS. As noted in the Principles and Plans, the Committee intends to adjust the monthly caps as follows: Treasury Securities: October 2018 to April 2019 - $30 billion; May 2019 to September 2019 - $15 billion and from October 2019 on - $0 billion. Agency Securities and MBS: October 2018 to April 2019 - $20 billion; May 2019 to September 2019 - $20 billion and from October 2019 on - $20 billion. From October 2019 on, the first $20 billion of any agency principal payments received will be reinvested in Treasury securities. Any additional agency principal payments above $20 billion will be reinvested in agency MBS.
Consistent with current practice for Treasury securities, the Desk will roll over at auction the principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceed the cap amount for that month. The Desk will allocate that rollover amount across the month’s maturity dates in proportion to the amount of SOMA Treasury holdings maturing on each of those dates. Rollovers will continue to be accomplished by placing non-competitive bids at Treasury auctions; the bids will be allocated across the securities being issued in proportion to their announced offering amounts. The final redemption cap will be applied to the September scheduled maturities, which occur on September 30.
Consistent with current practice for agency securities, the Desk will reinvest in agency MBS any principal payments from SOMA holdings of agency debt and agency MBS received during each calendar month that exceed the cap amount for that month. The Desk’s reinvestment purchases, if any, will be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market. The planned amount of reinvestments in agency MBS that is anticipated to take place over each monthly period will be announced on or around the ninth business day of the month and will generally be conducted over the subsequent one-month period until the next announcement.
Additionally, in the Principles and Plans, the Committee announced the planned conclusion of the reduction in aggregate securities holdings in the SOMA at the end of September 2019. Beginning in October 2019, principal payments received from agency debt and agency MBS holdings will be reinvested in Treasury securities via secondary market purchases subject to a maximum amount of $20 billion per month; any principal payments in excess of $20 billion will continue to be reinvested in agency MBS in a manner consistent with current practices. The Treasury securities purchases will initially be conducted across a range of maturities to roughly match the maturity composition of Treasury securities outstanding. The Desk will provide more details on these operations in May.
Monetary Policy Report (7/5/2019): Balance Sheet Policy: Over the first half of the year, the FOMC made two announcements regarding the longer-run policy implementation framework and its plans for normalizing the balance sheet. Following its January meeting, the Committee noted that it decided to continue to implement monetary policy in a regime with ample reserves. Consistent with that decision, in March, the Committee announced plans to conclude the reduction of its aggregate securities holdings at the end of September 2019. The Committee is prepared to adjust the details for completing balance sheet normalization in light of economic and financial developments, consistent with its policy objectives of maximum employment and price stability.
Federal Reserve Balance Sheet Composition
MBS Holdings of Federal Reserve: $1.527 trillion in agency MBS holdings - all purchased since 2008.
Since balance sheet normalization program commenced in Q4 2017, MBS holdings have decreased $(255) billion, or (14.3)% since mid-September 2017.
Commencing October 2019, the MBS portfolio will be in run-off mode.
FEDERAL RESERVE ACTIVITY IN AGENCY MBS MARKET: In recent years, the Fed has been a dominant purchaser of agency MBS.
The Fed had purchased approximately 20 to 25 percent of annual issuance of agency MBS, providing critical support to maintaining MBS market liquidity in the years at and after the mortgage crisis commenced.
With the commencement of the balance sheet normalization program which started during Q4 2017, the Fed's share of the MBS purchase market has fallen to <4% for latest twelve months with recent months at <1%.
The Federal Reserve has essentially been out of the Agency MBS market for the last several months.
FEDERAL RESERVE MBS HOLDINGS AS SHARE OF AGENCY MBS MARKET: With its objective to provide liquidity and stability to the Agency MBS market during the financial crisis, the Fed became a significant MBS investor.
From no MBS holdings prior to the crisis, the Fed jumped to a 20 percent market share in 2008 to a peak of 32 percent market share of agency MBS outstanding in 2014, providing critical support to maintaining MBS market liquidity in the years at and after the mortgage crisis commenced.
With the commencement of the balance sheet normalization program which started during Q4 2017, the Fed's share of the agency MBS market has slowly fallen to ~21% during 2019.
U.S. Treasury Holdings of Federal Reserve: $2.094 trillion in U.S. Treasury holdings.
Since balance sheet normalization program commenced in Q4 2017, U.S. Treasury holdings are down approximately $(371) billion, or (15.1)%.
Commencing in Q4 2019, the Fed will reinvest all U.S. Treasury securities maturing and, in addition, add to the portfolio by purchasing U.S. Treasury securities equivalent to the run-off in the agency MBS portfolio. This will result in the U.S. Treasury securities holdings rising toward $3.5 trillion from its current level of +$2 trillion.
Balance Sheet of Federal Reserve: The balance sheet of the Federal Reserve is $3.773 trillion.
Balance sheet normalization program commenced in Q4 2017 and balance sheet has shown measured, disciplined decreases totaling $(644) billion, or (14.6)%.
Commencing in Q4 2019, the Fed expects to target a balance sheet leveling off at approximately $3.5 trillion and holding primarily U.S. Treasury securities.
BALANCE SHEET "NORMALIZATION": The Federal Reserve commenced its balance sheet normalization program in Q4 2017.
Since commencement, the balance sheet has declined by $(644) billion, or (14.6)%, to $3.773 trillion.
MBS holdings have declined by $(255) billion, or (14.3)%, to $1.527 trillion.
U.S. Treasury securities holdings have declined by $(371) billion, or (15.1)% to $2.094 trillion.