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Market Commentary

FOMC Minutes Point to Higher Rates

Posted on May 24, 2018

The minutes from the last FOMC meeting signal the Fed is prepared to increase rates again in June. If the economy performs as expected, the committee indicated "it would likely soon be appropriate for the committee to take another step" in raising rates, according to minutes of the Fed's May 1-2 meeting. Markets are pricing in a 100% chance of a hike in a few weeks at the June 13th meeting.

Good morning!

  • Yes, the FOMC minutes from the May 1-2nd meeting signaled the Fed is going to move again
    • The Fed was monitoring curve shape and that a "modest" inflation overshoot could be permitted for the time being
    • Some key excerpts from the minutes:
      • "However, several participants thought that it would be important to continue to monitor the slope of the yield curve, emphasizing the historical regularity that an inverted yield curve has indicated an increased risk of recession"
      • "In light of subdued inflation over recent years, a few participants observed that adjustments in the stance of policy should take account of the possibility that longer-term inflation expectations have drifted a bit below levels consistent with the Committee's 2% inflation objective"
      • "A few participants noted that if increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its longer-run normal level before too long. In addition, a few observed that the neutral level of the federal funds rate might currently be lower than their estimates of its longer-run level"
      • The Fed emphasized that it wasn't as concerned by the modest overshoot in inflation and that inflation running slightly hot "could be helpful"
    • The committee discussed removing forward guidance as the fed funds rate is likely close to neutral
    • As mentioned above, the committee pretty much is signaling another rate hike in June
      • Something to watch for with this rate hike:
      • Increased demand for repo due to the increase in interest rates has caused the fed funds rate to rise toward the top of its range. Deputy manager of the SOMA suggested a 5bp reduction in the Interest On Excess Reserves (IOER) should reestablish the fed funds rate in the middle of its range
        • "This could be accomplished by implementing a 20 basis point increase in the IOER rate at a time when the Committee raised the target range for the federal funds rate by 25 basis points. Alternatively, the IOER rate could be lowered 5 basis points at a meeting in which the Committee left the target range for the federal funds rate unchanged."
      • Participants "generally agreed" it would be best to make the adjustment soon, and best to do it at a time when the fed funds rate will rise
      • Adding the hints together, it seems likely the FOMC will raise the IOER 20bp when it hikes 25bp on June 13th, opening a 5bp gap between the return on required reserves and the return on excess reserves
        • Something to watch for those that have overnight funds at the Fed…we knew this day was coming
  • The Architecture Billings Index (ABI) rose to 52.0 in April from 51.0 in March
  • So far, the ABI has remained above 50 for all four months of 2018, which is consistent with increased demand for architecture services
  • New home sales declined 1.5% to a 662,000-unit annual pace in April as sales in March were revised lower to a 672,000-unit annual pace
    • Even with downward revisions, new home sales are up 8.4% year-to-date
    • The regional breakdown: sales were mainly driven by a drop in the West with home purchases decreasing 7.8% to a 176k annualized rate
      • Sales increased in the South and Northeast while sales in the Midwest were unchanged.
    • The median new house price plunged 6.9% to $312k in March from a year ago, while the average price surged by 11.3% to $407k, the highest on record
    • Inventory ticked up to 300k representing a supply of 5.4 months at the current sales rate
  • Fed's Dudley, Harker, Bostic speak today
  • Treasuries
    • 2-yr: 2.51%
    • 10-yr: 2.98%
    • 30-yr: 3.14%
    • 1-month: 1.97%
    • 3-month: 2.33%
  • Fed funds effective was 1.70%

Have an awesome weekend!


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