Assessing Liquidity Conditions and Rate Hike Expectations: Insights from Fed Minutes and Money Market Pricing
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On liquidity conditions the Fed noted the build in US Treasury balances post the debt ceiling suspension through more bill issuance, and for that to coincide with a tightening in conditions.
The Fed expected the rise in the Treasury cash account to be offset by falls in reverse repo balances, and that bank reserves would also fall. Still, the Fed sees bank reserves remaining ample through to the end of 2023. The latter is an interesting insight, as it suggests the Fed is not concerned as of yet that liquidity conditions are at a point where they could prove troubling for the system.
This appears to pave a safe route for further funds rate hikes. A 25 basis point hike is now 85% discounted for July, and there was nothing in the minutes to negate that discount. In fact there was more there in support of the risk for another hike beyond the July one. At this juncture the Fed does not see enough out there to send any sense that it is done with hikes.
Our latest view on US market rates is contained here, rationalising the persistent drift towards a 4% handle for the 10yr Treasuy yield.
Money market pricing of Fed and ECB key rate changes
