Laura: No change in rates, what did we learn today?
Will: This FOMC meeting seemed to repeat a lot of what we heard at the January meeting. Mainly, that there is a lot of uncertainty due to the number of variables in play regarding how this administration’s plans are going to impact the economy.
Laura: There has been a lot of survey data that is pointing towards higher inflation. Isn’t this a concern for the Fed?
Will: Yes and no. The near-term inflation expectations have risen according to some survey data, but longer-term inflation expectations have not. And market indicators like the five year forward rate on five year rates (aka 5y5y) are not showing any signs of higher inflation.
Laura: And isn’t there also concern over the accuracy of survey data?
Will: Yes, glad you mentioned that. Surveys are good but sometimes a person’s survey response is very different than their actions. Chair Powell mentioned this saying sometimes one can be gloomy on a survey but then goes and buys a new car.
Laura: So, is the expectation that the economy will slow?
Will: The Chair was very balanced in his remarks, saying there are some good signs and some signs for concern. He continued to emphasize that the level of uncertainty is high and that the Fed will continue to wait for more clarity. He does expect that clarity to come this year as fiscal policy becomes known. He did note that the increase to their inflation forecast is reflective of the expectation that tariffs will impact prices, although the last round of tariffs’ inflationary effect was transitory (2018). See the statement here
Laura: What about the balance sheet and QT? The US Treasury roll off was reduced by $20bln?
Will: Yes, The FOMC did make a change to the number of US Treasuries they allow to roll off the balance sheet. Previously they had been allowing up to $25bln of UST to roll off per month – this was reduced to just $5bln. Powell noted this is not a change to monetary policy and said there was strong support amongst the committee to slow the pace of this roll off and lengthen the time before they ultimately stopped QT completely. They will still allow their MBS holdings to roll off at previously set levels. Currently up to 35bln of MBS can roll off each month, however only $15-18bln roll off because of the very low coupons and little refinance opportunities.
Laura: Was this change in light of the debt ceiling drama that could be coming?
Will: Most likely yes, there will be large swings in the US Treasury’s general account and that can impact reserves in the system and potentially pose funding challenges. So, by lowering the amount of UST that roll off this could mitigate those challenges.
Laura: Anything else?
Will: Chair Powell made one comment that I thought was interesting. He said there is not a lot of confidence in forecasts right now, but they are well positioned for any outcome. I thought this was refreshing to hear he’s feeling the same uncertainty that we all are.