Federal Reserve Alert! A Review of the FOMC Minutes and the speeches from Minnesota Fed President Neel Kashkari, Vice Chair Michael Barr, and Michelle Bowman.

by Dismal-Jellyfish

Minutes of the Federal Open Market Committee Sept 20–21, 2022

‘Highlights’:

  • ‘Participants judged that the Committee needed to move to, and then maintain, a more restrictive policy stance in order to meet the Committee’s legislative mandate to promote maximum employment and price stability. Many participants noted that, with inflation well above the Committee’s 2 percent objective and showing little sign so far of abating, and with supply and demand imbalances in the economy continuing, they had raised their assessment of the path of the federal funds rate that would likely be needed to achieve the Committee’s goals.’
  • ‘Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.’
  • ‘Many participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time until there was compelling evidence that inflation was on course to return to the 2 percent objective.
  • ‘Several participants underlined the need to maintain a restrictive stance for as long as necessary, with a couple of these participants stressing that historical experience demonstrated the danger of prematurely ending periods of tight monetary policy designed to bring down inflation.’
  • ‘Participants noted that the Committee’s commitment to restoring price stability, together with its purposeful policy actions and communications, had contributed to a notable tightening of financial conditions over the past year that would likely help reduce inflation pressures by restraining aggregate demand.’
  • ‘Most participants remarked that, although some interest-sensitive categories of spending—such as housing and business fixed investment—had already started to respond to the tightening of financial conditions, a sizable portion of economic activity had yet to display much response. They noted also that inflation had not yet responded appreciably to policy tightening and that a significant reduction in inflation would likely lag that of aggregate demand’
  • ‘Participants observed that a period of real GDP growth below its trend rate, very likely accompanied by some softening in labor market conditions, was required. They agreed that, by moving its policy purposefully toward an appropriately restrictive stance, the Committee would help ensure that elevated inflation did not become entrenched and that inflation expectations did not become unanchored. These policy moves would therefore prevent the far greater economic pain associated with entrenched high inflation, including the even tighter policy and more severe restraint on economic activity that would then be needed to restore price stability.’

Effective September 22, 2022, the Federal Open Market Committee directs the Desk to:

  • Undertake open market operations as necessary to maintain the federal funds rate in a target range of 3 to 3¼ percent.
  • Conduct overnight repurchase agreement operations with a minimum bid rate of 3.25 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair.
  • Conduct overnight reverse repurchase agreement operations at an offering rate of 3.05 percent and with a per-counterparty limit of $160 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair.
  • 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.
  • Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons.
  • Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions.

Speech from Minnesota Fed President Neel Kashkari

Only been able to find a video of the townhall so far and have not had time to watch all the way yet.

Fed Vice Chair Michael Barr speaks at DC Fintech Week event

Crypto-assets have grown rapidly in the last several years, both in market capitalization and in reach. But recent fissures in these markets have shown that some crypto-assets are rife with risks, including fraud, theft, manipulation, and even exposure to money-laundering activities. Crypto-asset-related activity, both outside and inside supervised banks, requires oversight that includes safeguards to ensure that crypto service providers are subject to similar regulations as other financial services providers.

The Board is working with our colleagues at the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) to ensure that crypto-asset-related activities banks may become involved in are well regulated and supervised, to protect both customers and the financial system.

The recent volatility in crypto markets has demonstrated the extent of centralization and interconnectedness among crypto-asset companies, which contributes to amplified stress. While banks were not directly exposed to losses from these events, these episodes have highlighted potential risks for banking organizations.

Looking ahead, there are additional types of crypto-asset-related activities where the Fed may need to provide guidance to the banking sector in the coming months and years.

Stablecoins linked to the dollar are of particular interest to the Federal Reserve. As Chair Powell said the other day, a central bank is and will always be the main source of trust behind money. Stablecoins borrow that trust, so we have an abiding interest in a strong federal prudential framework for their use.

We are seeing banks explore a variety of different models to issue dollar-denominated tokens on distributed ledger networks. The proposals range from issuance of tokens on private, controlled networks to facilitate payments within or among banks, to proposals that explore issuance of freely circulating tokens on open, permissionless networks.

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Banks and service providers will be able to build innovative financial products using FedNow’s real-time, low cost, safe payment rails, benefiting households and businesses. We plan to launch FedNow between May and July next year. It will help to lower costs, extend access, and improve security for consumers and safety for the financial system.No conversation about payments innovation is complete without mention of central bank digital currencies (CBDC). The Federal Reserve has not made any decisions about whether to issue a CBDC, and if we believe it makes sense to do so, we would want the support of Congress and the Administration

Fed Gov. Michelle Bowman speaks at Money Marketeers

You likely already know that I have fully supported the Federal Open Market Committee’s (FOMC) decisions over the past several meetings. Those decisions were to increase the target range for the federal funds rate in 75 basis point increments, and the federal funds rate now stands at 3 to 3-1/4 percent. Inflation is much too high, and I strongly believe that bringing inflation back to our target is a necessary condition for meeting the goals mandated by Congress of price stability and maximum employment on a sustainable basis.

If we do not see signs that inflation is moving down, my view continues to be that sizable increases in the target range for the federal funds rate should remain on the table. However, if inflation starts to decline, I believe a slower pace of rate increases would be appropriate. To bring inflation down in a consistent and lasting way, the federal funds rate will need to move up to a restrictive level and remain there for some time.

My general point is that inflation is much too high, and the outlook for inflation remains significantly uncertain. This uncertainty makes it very challenging to provide precise guidance on the path for the federal funds rate.

It is important to note that the degree of specificity contained in the Committee’s forward guidance comes with tradeoffs. Explicit forward guidance hasn’t always been viewed as a helpful addition to the monetary policy toolkit, particularly before the 2008 financial crisis. Before that time, while there was some acknowledgement that forward guidance could meaningfully affect financial conditions, there was a great deal of concern about the “costs and risks” of providing this type of guidance

I will focus here on two features of our current environment that I see as especially relevant for assessing the role of explicit forward guidance as a monetary policy tool in the current conduct of monetary policy. The first is that with inflation unacceptably high and the resulting urgent need to remove monetary policy accommodation, the federal funds rate is no longer near zero. The Committee can now indicate its intended stance of monetary policy through changes to the target range for the federal funds rate—its stated primary tool of monetary policy—rather than relying on more unconventional monetary policy tools, such as forward guidance and balance sheet policy, to serve as the main indicators of the stance of monetary policy. The second is that the outlook for inflation and economic activity is especially uncertain, with significant two-sided risks. Gone are the days when the risks to the outlook were skewed to the downside, especially with respect to inflation. And two-sided risks to economic activity are also widely recognized by the public, with press reports of an overheating labor market often featured alongside discussions of high or rising recession risks.

In our current environment, I view the benefits of providing explicit forward guidance as lower than they were in the years immediately after the 2008 crisis. Given that the federal funds rate is now well above zero, the FOMC can communicate changes in the stance of monetary policy through changes in the target range for the federal funds rate and not rely on explicit forward guidance as it did when the federal funds rate was at the effective lower bound.

The Committee’s experience in the second half of last year illustrates this point. Looking back, one might reasonably argue that during that time the Committee’s explicit forward guidance for both the federal funds rate and asset purchases contributed to a situation where the stance of monetary policy remained too accommodative for too long—even as inflation was rising and showing signs of becoming more broad-based than previously thought. The facts on the ground were changing quickly and significantly, but the communication of our policy stance was not keeping pace, which meant that our policy stance was not keeping pace.

Of course, the fact that some of the data that were directly relevant to our decision-making did not accurately reflect the economic conditions prevailing at the time—and which were subsequently revised—likely also led to a delay in the removal of monetary policy accommodation in 2021.

My own view is that discussions about the use of explicit forward guidance as a policy tool should be limited. It should be used during periods when the Committee cannot adjust the federal funds rate any lower due to the effective lower bound, and when the Committee also has reasonable confidence that that the federal funds rate will need to remain near zero for a period of time to stimulate growth and when inflationary pressures are expected to be subdued.

Clear and transparent communications with the public reinforce the effectiveness of our monetary policy and keep us accountable to the public. Under current circumstances, however, the best we can do on the public communications front is, first, to continue to stress our unwavering resolve to do what is needed to restore price stability. Second, as Chair Powell noted recently, we should acknowledge that the outlook for inflation and economic activity is subject to unusual uncertainty, and that, as a result, we will be making our policy decisions on a meeting-by-meeting basis.

 

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