Fed: Just a technical adjustment to IOER – Wells Fargo

The Federal Reserve, as expected, kept its target range for the interest rate at 1.50% to 1.75%. Analysts at Wells Fargo explained the FOMC also decided to raise the rate it pays commercial banks on the reserves they hold at the Fed (IOER). According to them this increase is largely a technical adjustment and does not represent a fundamental change in monetary policy.

Key Quotes: 

“All ten voting members of the committee agreed with the decision to keep rates on hold. The committee’s characterization of the current state of the economy was little changed relative to the statement that was released at the conclusion of the last FOMC meeting on December 11."

“The effective fed funds rate, which is the rate that is determined in the market, has been trading near the bottom of the target range for some time. The FOMC would like to see this rate more in the middle of the 1.50% to 1.75% range. By raising the IOER, the FOMC gives banks more incentive to keep reserves parked at the Fed, which should help to push the fed funds rate back toward the middle of the range.”

“The Fed started to buy T-bills in October to relieve upward pressure on repo rates. The Fed has been buying T-bills at a pace of roughly $60 billion per month. The FOMC did not specify an amount of planned T-bill purchases going forward, which is consistent with our view that the Fed will ramp down its monthly purchases from the current pace of $60 billion/month at some point during the first half of the year.”

“The committee would raise rates in 2020 only if growth turned out to be much stronger than expected and/or if inflation were to shoot suddenly higher, which does not seem very likely. On the other hand, the FOMC likely won’t cut rates unless the economy were to falter, which we do not expect.”