Rates Spark: Just a tweak

By ING Economics8 days ago


FOMC minutes reference the IOER (again); with SOFR stuck at 1bp. We think the Fed should hike it already. Just a technical thing, no more. The ECB's detailed purchase data for Feb/Mar shows little change of strategy beyond the pick-up in purchase volumes of late. Today's ECB minutes might document some controversy behind the decision taken in March.

FOMC minutes keep a lid on the front end

The central interpretation of the FOMC minutes is of a Federal Reserve that remains doggedly dovish. Policy rates will remain low until there has been a material recovery on the labour market. Forecasting recovery is not enough; it needs to actually happen.

That clearly implies that the Fed will have its blinkers on as PPI and CPI readings start popping like corn on a pan on releases due in the coming couple of weeks. By that time the inflation story at least will be more reality than a forecast. But even then, the Fed expects inflation to rise some more and then to ease lower again, but won't know that for sure until it does. A real waiting game this is.

There is clearly underlying downward pressure on front end rates

Another notable aspect of the FOMC minutes for the money market geeks is the reference (again) to the potential for a tweak in the Interest Rate on Excess Reserves (IOER), if needed. We think it is (needed that is). SOFR has been flat-lining at 1bp for a couple of weeks now. It has not been this low for this long ever before. There is clearly underlying downward pressure on front end rates. The enlarged Fed reverse repo facility at an implied zero stands between SOFR at 1bp and a dip to zero. It likely won't go negative, but it is too close for comfort.


The current SOFR fixing

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