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Rabobank analysts suggest that today’s release of the FOMC minutes will be watched closely for clues on the Fed’s rate path and the recent stress in the repo markets.

Key Quotes

“Turning to rates first, the latest dot plot showed that 13 out of 17 FOMC members sees policy on hold for the whole of 2020, with the other four forecasting a single rate hike(!). And Powell stressed that the Fed is not in a hurry to change its policy stance after the three insurance cuts of 2019: it would take “a material reassessment” for the Committee to alter its stance.”

“That said, the previous dot plot, made in September, failed to signal the 25bp cut that materialised only one month later. We are sceptical about this new dot plot too: Cracks are starting to appear in the US economy and a mild recession appears to be in the making. Philip therefore expects a series of rate cuts this year. The big question is what economic data constitutes this ‘material reassessment’ that the Fed requires to conform to this view.”

“The turn of the year went by pretty smoothly in the repo market, and we witnessed no new spikes in the general collateral rates. However, this was only thanks to the FOMC’s repo interventions. On December 31, the market sought USD 25.6bn in overnight funding from the New York Fed, in addition to the USD 230bn that had already been provided through longer-term operations.”

“The decision to purchase T-bills to increase liquidity should help to further alleviate the recent tensions, but that’s not a structural solution. Today’s minutes may reveal how the various FOMC members feel about a standing repo facility as a more permanent fix.”