FOMC protocols: all according to plan

The publication of the hopelessly outdated FOMC protocol for the December meeting did not lead to an increase in volatility since all changes in rhetoric were already repeatedly announced in recent weeks by a number of Committee members. The market has received confirmation that the Fed is preparing to "become patient," that is, plans to raise the rate twice this year have not yet been canceled, but can be adjusted at any time.

Why exactly two enhancements? There are quite objective reasons for this.

Strictly speaking, the Fed fulfilled its task, which was not voiced directly, but at the same time was strictly carried out. In October 2008, in order to raise funds for QE, the Fed set the rate for excess reserves of commercial banks above the effective rate (or overnight). As a result, the interbank lending market has almost disappeared, but the balances of commercial banks in the Fed's accounts began to grow from almost zero and at the peak, by the end of QE3 they reached $ 2.8 trillion.

In December 2015, the Fed launched a reverse process, when the Fed's rate increase of 2.25% was accompanied by a 0.2% increase in the rate of excess reserves, which with each successive increase led to a reduction in the spread. And since the spread was falling, the additional profit was also decreasing, which began to be accompanied by the outflow of commercial banks' money from the Federal Reserve accounts.


In December 2018, both rates finally became equal, that is, from this point on, the additional profit from the fact that commercial banks kept excess reserves in the Fed's accounts disappeared, which means that the number of excess reserves will continue to decline at a high rate.

Thus, the Fed implements two main tasks, reducing its balance due to the outflow of previously attracted funds from commercial banks in the process of QE and at the same time participating in changing the structure of holders of public debt. After all, excess reserves should return to the interbank lending market, and if they remain unclaimed due to a general slowdown in economic growth, then bankers have no choice but to buy treasuries or go to non-American markets.

It is clear that neither the Fed nor the Trump administration can accept the second scenario, otherwise who will buy American bonds if the activity of foreign investors decreases and the Fed reduces the balance? This means that it will take at least one more rate increase in order for the effective rate to be just above the level of the reserves of commercial banks and they continue to withdraw their funds from the Federal Reserve accounts.

It is also obvious that a period of stabilization and growth of risky assets is required since the Fed cannot allow tightening of financial conditions at higher rates, because the dollar will be adjusted down, and the cost of risky assets will grow to justify another increase. It also means that a recession in the United States will, by all means, pull off at least by the end of 2019, probably the recovery in oil prices and an attempt to revive world trade.

Today, 4 members of the Committee, including J. Powell, are expected to speak at once, according to the tone of comments, conclusions will be made, most likely, in favor of the scenario outlined above. On Friday, an inflation report for December, there is a threat of a strong slowdown in price growth, since just before the next rate increase in March or June, it will be necessary to correct inflation statistics. In any case, the dollar will be under pressure, since the majority of players will be satisfied with it being weakened at the current stage.


Today, the ECB will publish a protocol to the last meeting, but it is unlikely that it will provoke a sell-off of the euro. The currency pair EUR / USD is still set to continue to grow, attempts to get to the resistance level of 1.1620 are quite likely, support has moved to the level of recent resistance of 1.1490 / 1.1510.

Great Britain

The pound is stable in the absence of news, the markets will wait for the results of the Brexit parliamentary vote next week, so GBP / USD cannot enter the growth phase, despite favorable conditions. Nevertheless, the growth of the pound is still a little more likely, we expect an attempt to go through the resistance of 1.2813 and gain a foothold above.

The material has been provided by InstaForex Company -