There are two key takeaways from the Fed minutes released overnight. First, the minutes offered a more cautious take on easing. Many participants that it is “complicated” to assess the degree of restrictiveness on current monetary policy settings. In particular, the appropriate neutral rate is uncertain and may well be higher than what the Fed pencilled in for September (2.9%). From the market’s perspective, this is not new. Given resilient US data and upside growth / inflation risks, the market is barely pricing in three more cuts by the end of 2025, taking the FFR to 4%. In any case, we still think the Fed would cut in December, but could well signal an even slower pace of easing going forward.
Second, the Fed hinted on a “technical” adjustment in the RRP rate. Currently, the RRP rate stands at 4.55bps, 5bps higher than the FFR lower bound. The Fed is mulling aligning the RRP to the FFR floor, which would imply a 5bps rate cut. Given that the Fed is considering such an option, it may mean that such a change is imminent (probably December’s FOMC meeting). Funds placed at the RRP facility has declined steadily from close to USD 2.5tn to around USD 148bn currently as QT progresses. If the tweak occurs, the remaining funds could flow out into other short-term instruments, lowering short-term USD rates in general. That said, this looks to be a one-off adjustment on rate levels and short-end swap spreads (turn more inverted). The motivations for the Fed could be twofold – to ensure sufficient liquidity to cross the year end and to prepare for the end of QT some time in 2025.
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