The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
U.S. Monetary Policy Normalization is Proceeding Smoothly Remarks at the China Finance 40 Forum – Euro 50 Group – CIGI Roundtable Paris, France Simon Potter October 26, 2018 The views presented here are those of the author and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System Figure 1: Effective Federal Funds Rate (EFFR) and Interest on Reserves (IOR) Percent Target Range IOR EFFR 2.5 2.0 1.5 1.0 0.5 0.0 Oct '15 Apr '16 Oct '16 Apr '17 Source: Federal Reserve Bank of New York; Board of Governors. Oct '17 Apr '18 Oct '18 Figure 2: Average Distribution of Traded Overnight Money Market Rates Percent of Volume 100 Dec. 2017 Mar. 2018 Jun. 2018 Sept. 2018 Fed Funds Eurodollars 75 Tri-Party Repo 50 25 0 75 85 95 105 115 125 135 145 155 165 175 185 195 205 215 225 235 Basis points Note: Each period comprises the 10 non-month-end business days following a change to the target range. Distributions represent the volume-weighted 1st, 10th, 20th, 25th, 30th, 40th, 50th, 60th, 70th, 75th, 80th, 90th, and 99th percentile of rates. Dotted line represents the median rate. Dashed lines represent IOR during each period. Source: FR 2420 Report of Selected Money Market Rates; BNYM; Board of Governors. Figure 3: Select Overnight Money Market Rates Percent 2.5 2.0 Target Range IOR Overnight Bank Funding Rate (OBFR) Secured Overnight Financing Rate (SOFR) Tri-Party General Collateral Rate (TGCR) 1.5 1.0 0.5 0.0 Oct '15 Apr '16 Oct '16 Apr '17 Source: Federal Reserve Bank of New York; Board of Governors. Oct '17 Apr '18 Oct '18 Figure 4: Overnight Rate Dispersion EFFR 1M Bill OBFR IOR Basis points +30 TGCR SOFR Median ON ED ON RRP Top of +25 target range +20 +15 +10 +5 Bottom of +0 target range -5 1/2/201512/16/2015 12/15/20163/15/2017 6/15/201712/13/2017 3/22/20186/14/2018 9/27/201810/23/2018 Time periods between increases in the federal funds rate target range Source: Federal Reserve Bank of New York; Board of Governors; Bloomberg. Figure 5: Principal Payments on SOMA Security Holdings $ billion Maturity Profile of SOMA Treasury Securities 80 70 Reinvestments $ billion Projected Paydown Profile of SOMA Agency Debt and MBS Principal 30 Redemptions Estimated Reinvestments Estimated Redemptions 25 Redemption cap 60 Reinvestments Redemptions Estimated Reinvestments Estimated Redemptions Redemption cap 20 50 40 15 30 10 20 5 10 0 Jan '18 Jun '18 Nov '18 Apr '19 Source: Federal Reserve Bank of New York. Sep '19 0 Jan '18 Jun '18 Nov '18 Apr '19 Sep '19 Source: Federal Reserve Bank of New York. Based on current market-implied interest rate assumptions. Figure 6: Estimated Impact of Changes to Reinvestment Policy Basis points ≥50 50 25 0 -25 10-Yr TSY Yield 30-Yr MBS OAS Jul. '17: Impact over 2-yr period following implementation 10-Yr TSY Yield 30-Yr MBS OAS Sep. '18: Effect from Oct. '17 through Sep. '19 *Red dot indicates median. Based on a matched sample of responses from the July 2017 and September 2018 Surveys of Primary Dealers and Market Participants. Source: Federal Reserve Bank of New York. Figure 7: Expectations for Liabilities and Capital (on average in 2025) $ billions 3,000 2,500 Survey Range: 25th/75th percentile 2,000 Survey Median Current level* 1,500 1,000 500 0 Federal Reserve Notes Reserves Reverse Repos Reverse Repos Other Deposits Deposits in with Private with Foreign Treasury General Account Counterparties Official Accounts (TGA) All Other Liabilites and Capital *Current figures from H.4.1 as of October 18, 2018 Source: Board of Governors, Federal Reserve Bank of New York; Based on all responses to the June 2018 Surveys of Primary Dealers and Market Participants. Figure 8: Expectations for Assets (on average in 2025) $ billions 3,500 Survey Range: 25th/75th percentile Survey Median 3,000 Current level* 2,500 2,000 1,500 1,000 500 0 U.S. Treasuries Agency MBS All Other Assets *Current figures from H.4.1 as of October 18, 2018 Source: Board of Governors, Federal Reserve Bank of New York; Based on all responses to the June 2018 Surveys of Primary Dealers and Market Participants. Figure 9a: Federal Funds and Eurodollar Trading Volumes at Rates Relative to IOR Federal Funds Volume Rate Distribution $ billions 120 100 < IOR-5 IOR-4 IOR-2 IOR Volume at Median Rate IOR-5 IOR-3 IOR-1 > IOR Eurodollars Volume Rate Distribution $ billions 120 100 80 80 60 60 40 40 20 20 0 Apr '18 Jun '18 Sep '18 < IOR-5 IOR-4 IOR-2 IOR Volume at Median Rate 0 Apr '18 Source: FR 2420 Report of Selected Money Market Rates; Board of Governors. Jun '18 IOR-5 IOR-3 IOR-1 > IOR Sep '18 Figure 9b: Federal Funds and Eurodollar Trading Volumes at Rates Relative to IOR Federal Funds Volume Rate Distribution $ billions < IOR-5 IOR-4 IOR-2 IOR Volume at Median Rate 100 90 IOR-5 IOR-3 IOR-1 > IOR Eurodollars Volume Rate Distribution $ billions < IOR-5 IOR-4 IOR-2 IOR Volume at Median Rate 100 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 IOR-5 IOR-3 IOR-1 > IOR 0 10/2 10/5 10/11 10/16 10/19 10/24 10/2 10/5 Source: FR 2420 Report of Selected Money Market Rates; Board of Governors. 10/11 10/16 10/19 10/24 Figure 10: Daily Changes in Reserve Balances vs. Daily Changes in IOR-Average Fed Funds Rate Spread Percent Q1 2018 0.02 Q2 2018 Q3 2018 Q4 2018 0.01 Since 10/15/18 0.00 -0.01 Sept 17, 2018 -0.02 -100 -50 0 50 100 $ billions Note: Weekly reserve balances are above the recent lows reached at the end of September. Average federal funds rate is calculated as the volume-weighted average federal funds rate. Excludes month-ends. Source: Federal Reserve Bank of New York; Board of Governors. Figure 11: Daily Reserve Balances vs. Daily IOR-Average Fed Funds Rate Spread Percent 0.09 Q1 2018 0.08 Q2 2018 0.07 Q3 2018 0.06 Q4 2018 0.05 0.04 0.03 0.02 0.01 0.00 -0.01 1.5 1.75 2 2.25 2.5 $ trillions Note: Average federal funds rate is calculated as the volume-weighted average federal funds rate. Excludes monthends. Source: Federal Reserve Bank of New York; Board of Governors.