3 key takeaways from FOMC minutes

With respect to policy signals we did not learn much new , which also makes sense given the many Fed speeches recently. Consensus among FOMC members is that 'the current stance of monetary policy is appropriate ' and that the Fed wants to see how the economy reacts to the three insurance cuts last year. The Fed thinks the coronavirus is a new downside risk to the economy but so far it is monitoring the development, not reacting to it , as we argued in Fed Monitor: Monitoring, not reacting to, the coronavirus, 12 February.

On the upcoming monetary policy review, the Fed still aims to complete the review around the middle of the year, i.e. a decision could come in the second half of the year, perhaps already in September . The FOMC members had a long discussion about how to tweak the current symmetric 2% inflation target. While most participants 'expressed concerns ' about introducing a permanent inflation target range around 2%, as it could be misperceived as the Fed being comfortable with continued misses below 2%, the FOMC members still seem to prefer the idea of some sort of average inflation targeting. At the meeting, the FOMC members discussed the idea of an (temporary) asymmetric operational range with 2% being at or near the lower end of the range . This would signal to market participants that the Fed can tolerate inflation above 2% for some time without raising rates. The Fed thinks this may help signalling that it intends to keep inflation at 2% on average over time, which may help anchoring longer-run inflation expectations. In one of the charts to the right, we sketch how that may look in practice. Our base case is still that the Fed implements some sort of average inflation targeting this year, the question is the exact formulation of it .

The Fed is still seriously considering implementing a standing repo facility to make sure overnight rates do not surge again like last year. According to the minutes, 'several participants suggested that the Committee should resume before long its discussions of the role that repo operations might play in an ample-reserve regime including the possible creation of a standing repo facility '. We continue to monitor the discussions in upcoming speeches/meetings. With respect to the level of reserves, the Fed is still aiming at approximately USD1,500bn . This level is expected to be reached before April.

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