Quick Comments on FOMC Presser

1. Chair Powell stated that the Fed had conducted an intensive investigation into the role of supervision and regulation in the bout of repo volatility in September and that they would be announcing their findings soon.  (FWIW, my colleague Francisco Covas’ and my assessment can be found here).
2. Chair Powell indicated that the Fed was aiming for reserve balances that would stay above $1.5 trillion with normal fluctuations.  In a couple of speeches (see here and here), Lorie Logan (manager of the SOMA) has stated that operating a system with scarce reserves could require daily repo operations of $100 billion, suggesting that, to keep reserves above $1.5 trillion, the Fed will need to provide reserves that average $1.6 billion. I wouldn’t be surprised if they target $1.7 trillion.
3. Powell stated that the Committee was aiming to have the fed funds rate and the IOER rate well within the Committee’s target range.  I first thought it was a slip of the tongue – the Committee establishes a range for the fed funds rate, not the IOER rate.  The IOER rate is just a tool to put the funds rate in the range.  But the Chair went on to discuss how the previous setting for the IOER rate of 1.55 percent was only 5 bp above the bottom of the range, which was not “well within” the range (of 1.5 to 1.75 percent), but the current setting of 1.6 percent was.  That suggests the Committee will be seeking to keep the fed funds rate close to the IOER rate.  Based on recent readings (see graph), reserve balances of $1.7 trillion will result in a fed funds rate about 5 bp below the IOER rate.

For my part, I think the Fed will find that banks, and bank supervisors, will get used to whatever level of reserve balances the Fed provides and demand will ratchet up to that level.  I’ll refrain from editorializing, but those interested in my views on the Fed’s implementation framework can read my remarks at Brookings (here) and CATO (here).

Well, editorializing just a bit, at the November 2018 FOMC meeting, the participants decided “…that if the level of reserves needed for a regime with abundant excess reserves turned out to be considerably higher than anticipated, the possibility of returning to [the pre-crisis regime] would warrant further consideration.”  While the Committee didn’t indicate what level of reserves they judged would be necessary, an informed guess is $1 trillion.  If they have now concluded that the level is 70 percent higher than they thought, then they should surely be reconsidering their decision to conduct policy with an ample reserve framework.  Unless all that talk about “reconsidering” was just means to placate the Committee participants who weren’t sold on the idea.

Bill

Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.