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March Flashlight for the FOMC Blackout Period: No Major Policy Changes but Perhaps Some Technical Tweaks

Summary

We do not look for the FOMC to make any major monetary policy changes at its March 16-17 meeting. Moreover, we expect the Committee to clearly articulate that it has no intention of raising rates or otherwise removing policy accommodation anytime soon.

Prospects for the economy have brightened in light of recent sharp declines in new COVID cases and rising expectations for robust fiscal policy measures, which should boost economic growth. We expect the FOMC to acknowledge this brighter outlook for real GDP growth through its Summary of Economic Projections (SEP), which articulates the Committee’s macroeconomic forecasts. But, any upward adjustment that the Committee makes to its inflation forecast should be modest, because most Fed policymakers have signaled that they believe the pickup in inflation this year will prove to be temporary. The so-called “dot plot” may show that a committee member or two has shifted forward expectations for tightening policy, but we are skeptical that the bulk of the committee will be penciling in liftoff by 2023.

We also look for a technical adjustment or two to some operational procedures due to recent developments that have caused short-term interest rates to drift uncomfortably low. Specifically, we expect the FOMC to upwardly adjust the interest rate that the Federal Reserve pays on reserves that commercial banks hold at the central bank, so-called IOER. We also look for the Committee to bump up the Fed’s interest rate on its overnight reverse repo facility (ON RRP), and to boost the $30 billion per day counterparty limit for ON RRP operations. We stress, however, that any such moves would be technical adjustments. They should not be interpreted as a signal of an imminent removal of policy accommodation by the Federal Reserve.

The Ides of March: A Very Different Meeting Than Last Year

In the lead-up to the scheduled meeting of the Federal Open Market Committee (FOMC) in March 2020, financial markets were coming unglued as the country woke up to the reality of the threat posed by the pandemic. The Committee did not stand on ceremony or even wait for its scheduled meeting on March 17-18, 2020. In a surprise move on March 3, the FOMC cut its target range for the fed funds rate by 50 bps. Then on Sunday, March 15, the Committee slashed rates by another 100 bps, which took the target range all the way back to 0.00% to 0.25%, and it restarted its quantitat