What are monetary policies and what to expect before the Fed meeting?

Wednesday, April 28, 2021 - 16:35
Point Trader Group
What are monetary policies and what to expect before the Fed meeting?

- We do not expect any new fundamental sign yet about (gradual) tightening even though the tone is (positive) that the economy is more positive than it was in March.

We expect the signal to evolve over time as the recovery continues, but we expect officials to be reluctant to say anything that could be interpreted as a (gradual) tightening signal. Until later this year.

We don't expect the Fed to announce any changes to IOER or RRP rates ... although increases are likely too long ago due to downward pressure on money market returns from growth in bank reserves.

- These changes must be looked at, as if they occurred, the market could have made a big technical move.

With Powell staying as far away as possible even from giving a hint of incrementalization, the currency markets may find little signals in today's meeting. Dr

With no strong market momentum, currency pairs may continue to trade steady before today's meeting.

 

IOER Mandatory Reserve

Commercial banks must adhere to regulations, including so-called reserve requirements. Meaning that banks must keep a certain portion of their deposits as cash in the Federal Reserve account; This is known as "Mandatory Reserve". Banks could choose to keep more liquidity in those accounts than the Federal Reserve requires; These are known as "excess reserves".

   ... the reserves required are quite stable and growing as a constant part of total deposits in the banking system. But excess reserves increased dramatically in 2008, as the Federal Reserve expanded the money supply to finance unconventional monetary policy measures such as quantitative easing.

In normal times, excess reserves are not profitable, as they do not earn a return. Instead of keeping cash as excess reserves, banks can lend this money and earn interest. However, after the 2008 recession, the Federal Reserve began paying interest on Excess Reserves (IOER). By changing incentives for commercial banks to extend loans or maintain excess reserves, the Federal Reserve can use IOER as an additional monetary policy tool.

 

RRP

Temporary open market operations include short-term buybacks and reverse repurchase agreements designed to temporarily add or drain available reserves to the banking system and influence day trading in the federal funds market.

A reverse repo agreement is a transaction in which the Federal Reserve Bank of New York, under authorization and direction from the FOMC, sells a security to a qualifying counterparty with an agreement to buy back the same security at a specified price at a specified time in the future. For these transactions, the eligible securities are U.S. Treasury instruments, federal agency debt, and mortgage-backed securities issued or fully secured by federal agencies.


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