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 March 2019 FOMC meetings. And, given the FOMC projections, it would appear that there are no hikes in the fed funds rate anticipated for the remainder of 2019. The next meeting of the FOMC where an interest rate decision is typically made is June 18-19.
Federal Reserve Perspective on Monetary Policy:
FOMC Statement (3/20/2019): “the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."
Speech 3/8/2019 - Chairman Powell (link): “The federal funds rate is now within the broad range of estimates of the neutral rate--the interest rate that tends neither to stimulate nor to restrain the economy. Committee participants generally agree that this policy stance is appropriate to promote our dual mandate of maximum employment and price stability. Future adjustments will depend on what incoming data tell us about the baseline outlook and risks to that outlook.”
FOMC Statement (1/30/2019): Rather than "further gradual increases" as in the December 2018 FOMC statement, the FOMC provided a more cautious perspective on Fed Fund rate increases: "In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."
FOMC Press Conference 12/19/2018 - Chairman Powell: Despite this robust economic backdrop and our expectation for healthy growth, we have seen developments that may signal some softening relative to what we were expecting a few months ago. Growth in other economies around the world has moderated somewhat over the course of 2018, albeit to still-solid levels. At the same time, financial market volatility has increased over the past couple of months, and overall financial conditions have tightened - that is, they have become less supportive of growth.
In our view, these developments have not fundamentally altered the outlook. Most FOMC participants have, instead, modestly lowered their growth and inflation forecasts for next year. The projections of Committee participants released today show growth continuing at healthy levels, the unemployment rate falling a bit further next year, and inflation remaining near 2 percent. The projections also show a modestly lower path for the federal funds rate, which should support the economy and keep us near our goals. As the economy struggled to recover from the financial crisis and the subsequent recession, the Committee held our policy rate near zero for seven years to give the economy the best chance to recover. And the economy did recover steadily, if slowly at times.
Three years ago, the Committee came to the view that the best way to achieve our mandate was to gradually move interest rates back to levels that are more normal in a healthy economy. Today we raised our target range for the short-term interest rates by another ¼ percentage point. As I’ve mentioned, most of my colleagues expect the economy to continue to perform well in the coming year. Many FOMC participants had expected that economic conditions would likely call for about three more rate increases in 2019. We have brought that down a bit and now think it is more likely that the economy will grow in a way that will call for two interest rate increases over the course of next year.
We always emphasize that our policy decisions are not on a preset course and will change if the incoming data materially change the outlook. And, given recent developments, the statement notes that we “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
FOMC Federal Funds Projections: At the March 2019 FOMC meeting, the federal funds projections were submitted. For 2019, the median fed funds rate was 2.40% and rising to 2.60% in 2020. This projection represented a lowering of the expected changes to the fed funds rate in 2019, indicating that NO hikes are anticipated during the remainder of 2019 compared to two hikes embedded in the December 2018 FOMC projections and three hikes embedded in the September 2018 FOMC projections.
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!
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 ?? 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.
Fed Statement on Balance Sheet Normalization and Monetary Policy (1/30/2019): The following is the FOMC statement on Balance Sheet Normalization and Monetary Policy following January 2019 meetings:
“After extensive deliberations and thorough review of experience to date, the Committee judges that it is appropriate at this time to provide additional information regarding its plans to implement monetary policy over the longer run. Additionally, the Committee is revising its earlier guidance regarding the conditions under which it could adjust the details of its balance sheet normalization program. Accordingly, all participants agreed to the following:
The Committee intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required.
The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy. The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”
Speech 3/8/2019 by Fed Chairman Powell (link): “The Committee has long said that the size of the balance sheet will be considered normalized when the balance sheet is once again at the smallest level consistent with conducting monetary policy efficiently and effectively. Just how large that will be is uncertain, because we do not yet have a clear sense of the normal level of demand for our liabilities. Current estimates suggest, however, that something in the ballpark of the 2019:Q4 projected values may be the new normal. The normalized balance sheet may be smaller or larger than that estimate and will grow gradually over time as demand for currency rises with the economy. In all plausible cases, the balance sheet will be considerably larger than before the crisis.”
“Right now, most measures of the health and strength of the labor market look as favorable as they have in many decades. Inflation will probably run a bit below our objective for a time due to declines in energy prices, but those effects are likely to prove transitory. Core inflation, which is often a reliable indicator of where inflation is headed over time, is quite close to 2 percent. Despite this favorable picture, we have seen some cross-currents in recent months. With nothing in the outlook demanding an immediate policy response and particularly given muted inflation pressures, the Committee has adopted a patient, wait-and-see approach to considering any alteration in the stance of policy.”
Federal Reserve Balance Sheet Composition
MBS Holdings of Federal Reserve: $1.570 trillion in agency MBS holdings - all purchased since 2008.
Since balance sheet normalization program commenced in Q4 2017, MBS holdings have decreased $(213) billion, or (11.9)% since mid-September 2017.
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 <6% 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 MBS holdings’ share of the agency MBS market has slowly fallen to ~22% during 2019.
U.S. Treasury Holdings of Federal Reserve: $2.114 trillion in U.S. Treasury holdings.
Since balance sheet normalization program commenced in Q4 2017, U.S. Treasury holdings are down approximately $(351) billion, or (14.2)%.
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 $3.851 trillion.
Balance sheet normalization program commenced in Q4 2017 and balance sheet has shown measured, disciplined decreases totaling $(567) billion, or (12.8)%.
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 $(567) billion, or (12.8)%, to $3.851 trillion.
MBS holdings have declined by $(213) billion, or (11.9)%, to $1.570 trillion.
U.S. Treasury securities holdings have declined by $(351) billion, or (14.2)% to $2.114 trillion.