“We’re Not Finished Yet” According to the FOMC Post Meeting Statement
The Federal Open Market Committee (FOMC) voted to raise its target rate on overnight interest rates from 5.00% – 5.25% to 5.25%-5.50% after the July 2023 meeting. This 25 bp move follows a pause in rate hikes decided during the June meeting. The Fed still maintains a hawkish stance after raising the Fed Funds rate to its highest level in 22 years and leaving quantitative tightening (QT) targets unchanged.
The implementation note following the meeting spells out QT implementation to reduce the Fed’s balance sheet as:
“Roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.”
“Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month.”
QT is an important part of the Federal Reserve Bank reducing the stimulus effect of having injected, through quantitative easing (QE), substantial amounts of money into the U.S. economy.
Words in the statement, particularly those changed from the prior meeting, are placed under the spotlight. In June, the FOMC members felt the U.S. economy was “growing” at a “modest” pace. Now it sees “more growth”—at a “moderate” level. This indicates that they may believe they have a higher need to continue tightening credit conditions.
At the previous meeting a Summary of Economic Projections (SEP) for the Fed Funds Rate indicated the Fed expected two additional 25 bp increases. While no SEP is available after the July meeting, the view the economy has become stronger, would suggest that at a minimum, another 25 bp is likely.
The FOMC as the monetary policy arm of the Federal Reserve is, as it says, “data dependent” when determining what tightening or other moves may be appropriate in the future.
Managing Editor, Channelchek
Source
https://www.federalreserve.gov/monetarypolicy/files/monetary20230726a1.pdf