An adjustment to the IOER could come in an unfamiliar situation for the Fed. In the previous two technical adjustments, the Fed was raising rates a quarter point while moving the IOER up just 20 basis points. With no rate hikes on the horizon, it’s unclear how an IOER move would work.
There’s also the question of communication: The market can be easily rattled by Fed rhetoric, and central bank officials might have a hard time explaining why it is taking more corrective action.
With the Fed walking a monetary policy tightrope, any irregularities are bound to garner attention.
The FOMC has telegraphed that it won’t be raising interest rates and it also set a timetable to halt the balance sheet reduction. Messaging around the policy normalization has been messy, with markets revolting after Fed Chairman Jerome Powell last year indicated more tightening was ahead. A policy pivot this year has reversed the damage.
Bond market veteran Kevin Ferry said the current move of the funds rate is probably “technical” in nature but said it’s unusual for the rate to be rising while most traders would prefer it lower and as the Fed has indicated a dovish posture.
“If there’s a danger, it’s that they’re beyond what the market would price in right now.That’s going to cause some tightening,” Ferry said. “They’ve never been ahead of the market. They’ve always been behind the market.”
If the situation persists, he anticipates the Fed will have to make an adjustment to the IOER.
“The question is, do you do it proactively and deal with all the repercussions, or do it retroactively with a big lee time?” Ferry said. “My favored methodology for efficacy is the first. But they’re opting for the latter.”
from Viral News Reports http://bit.ly/2vk00kE
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