Active Fed Chatter Last Week

Federal Reserve governors were out in full force last week, speaking on both the economy and the Fed’s plans for an eventual exit strategy from ultra-loose monetary policy.  On the economy, the Fed has remained steady in its assessment of a gradually improving employment situation and steadily increasing inflation.  The biggest risks to this outlook are the same ones that we have been calling out for the past few months: housing and developing economies.  Both new and existing home sales were reported last week and showed rebounds from the weak first quarter prints, which were likely due to poor weather.  In terms of the Fed’s eventual exit tactics, board members have been in active debates over the technical details of how they can tighten monetary policy.  In the past, the Fed has used the Fed Funds rate, but with its balance sheet having grown so large in recent years and bank reserves having increased substantially, it is questioning this approach.  One potential solution is its reverse repo program, which is essentially a way to drain excess cash from the system.  The Fed will be testing this program in the coming weeks and months for its effectiveness in achieving its goals.  The most important point to remember is that if the Fed’s bullish economic forecast plays out, tighter monetary policy is on the horizon.  No matter how it executes on this policy technically, it will likely mean higher levels of interest rates across the yield curve.