- The Federal Open Market Committee (FOMC) left the federal funds target range unchanged at 5.25-5.50%, as anticipated. However, the quarterly update for the Summary of Economic Projections (SEP) did suggest a hawkish bias, with the “dots” pointing towards one more hike this year and rates remaining high for longer.
- The Fed’s quantitative tightening (QT) program was left unchanged and has no immediate impact to market liquidity. It’s reverse repo (RRP) operations remains an outlet for Fed balance sheet adjustments and has helped absorb higher Treasury General Account (TGA) balances driven by increased Treasury bill issuance and a shrinking Fed balance sheet from QT.
- As we approach peak policy rates, money market funds continue to look for opportunities to incrementally add fixed rate duration, while high levels of portfolio liquidity will still allow the funds to quickly adjust to higher rates if the Fed continues to tighten policy.
September FOMC highlights
The FOMC unanimously decided to make no changes to the 5.25%-5.50% federal funds target range. Interest on reserve balances (IORB) and the overnight reverse repurchase agreement (RRP) rate were also left unchanged at 5.40% and 5.30%, respectively. The decision to leave rates untouched was largely anticipated by the market which ultimately left the SEP as the focal point of the discussion.
The SEP is released quarterly on FOMC meeting dates, and is the meeting participants’ projections of the most likely outcomes for growth, unemployment, and inflation over the next few years and the longer run. In addition, the Fed released its “dot” plot at the same meeting, which shows current estimates for the Fed’s monetary policy path.
The September SEP forecasts suggested a hawkish bias, with projections for growth and headline inflation higher and unemployment levels lower compared to the June release. This points to a more resilient economy despite 500 basis points (bps) of policy adjustments since March 2022, and could mean that the Fed potentially must do more hikes and/or remain high for longer. The median dot for year-end 2023 pointed towards one additional hike this year when the peak terminal rate of 5.625% will be reached. That dot was unchanged from June, however the 2024 and 2025 median expectations for the federal funds rate were each revised 50bps higher to 5.125% and 3.875% respectively.
Exhibit 1: Implied fed funds futures
Forecasts are not a reliable indicator of future results.
Source: J.P. Morgan Asset Management and Bloombeg, as at September 20, 2023.