Stop trying to frontrun the Fed. There will be no rate change this week.
— James P. Howard, II (@howardjp) April 27, 2015
Now, reading Federal Reserve press releases is practically its own subfield of Kremlinology. (Also, read this.) Now, due to the complications of executing monetary policy at the zero lower bound, the Fed got deeply involved in a lot of markets where they kinda never been before. Commercial paper, repos, even MBS. Cash was crack and the Fed was dealing.
So, anyway, because the terms on a lot of this stuff can go out as long as 30 years, an unfortunately small percentage of this stuff has rolled over. General consensus seems to be the Fed has to exit the exotics before they can start pushing rates up. And like quicksand, getting out is far more difficult than getting in. At the June meeting, the Fed will announce a plan to start unwinding the repos and MBS. Probably by selling in small chunks back onto the private market (maybe to primary dealers, which would be a huge mistake, but typical). If that goes well in the first few weeks and the market doesn’t get too soft, the July meeting will be largely congratulatory and the press release be the same as June, but with the date changed and a note that unemployment is now approaching the target.
In September, there will be a quarter point jump at the discount window effective within a week or so. In October, the Fed will raise the overnight rate target to a soft 25-50 bps.
Now let’s see what happens.
Image by DonkeyHotey.