Fed: The November Meeting

Published on November 7, 2018

With all the sound and fury in the wake of Tuesday’s midterm elections, we almost forgot the Federal Open Market Committee is due to issue its statement tomorrow afternoon to conclude its two-day November meeting.

*** We seriously doubt there will any substantive changes to the statement beyond the updating to the descriptions of the economy, nor do we expect a tweak in the Interest on Excess Reserves to come at this meeting. ***

*** Likewise we do not expect any mention of balance sheet policy whose debate is only just beginning at this meeting. Indeed, we do not expect any policy signaling takeaway other than, by default, leaving the door wide open to a likely rate hike at the December meeting. ***

The Balance Sheet Debate and the IOER

The FOMC meeting is likely to start today with a lengthy Committee discussion on the next steps to the central bank’s balance sheet normalization.

While we do not expect any major progress on the range of key balance sheet issues — whether the Fed will stick with the fed funds as its primary policy rate, whether a corridor or floor operating system will be eventually adopted, and what the optimal size of the balance sheet will be — a final decision on the balance sheet is for next year, maybe in the spring or summer, but not this year.

There has also been some speculation the FOMC might opt to slip in a downward tweak in the IOER by another 5 basis points from its current 2.20 bp, since the effective fed funds rate is already right up against it.

That will not happen tomorrow. It is highly likely to accompany the near certain rate hike in December to a new federal funds target range of 2.25%-2.5%, with the IOER probably going to only 2.4%, or a full ten basis points under the top end of the policy target range.

To do so now, without a rate hike, would present enormous messaging problems, with many in the market misinterpreting it as a dovish policy signal.

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