FED: December Meeting To Bring Likely Downward Adjustment To ON RRP Rate
At next week's FOMC meeting, there is a good chance that the offering rate on standing overnight reverse repurchase operations (ON RRP) will be lowered by 5bp more than the Fed funds rate. This rate is currently set at 5bp over the lower bound of the Funds rate. So if the Fed cuts rates by 25bp as expected to 4.25-4.50%, the ON RRP rate should be set at 4.25% (from 4.55% currently), aligning it with the lower funds rate bound.
- Such a technical adjustment was essentially off the radar until it was mentioned as a possibility in the November meeting minutes: “Some participants remarked that, at a future meeting, there would be value in the Committee considering a technical adjustment to the rate offered at the ON RRP facility to set the rate equal to the bottom of the target range for the federal funds rate, thereby bringing the rate back into an alignment that had existed when the facility was established as a monetary policy tool.”
- The key factor considered by the FOMC is that "lowering the ON RRP offering rate 5 basis points would align the ON RRP offering rate with the bottom of the target range for the federal funds rate and would probably put some downward pressure on other money market rates." It could also reduce usage of the ON RRP facility (which in any case has seen takeup fall to close to $150B, vs $700+B at the start of the year), potentially helping reserves remain ample for a little longer.
- While an adjustment is now the consensus expectation, it's unclear how much it is priced in. If the 5bp downward adjustment is made, it would be expected to have a downward impact on a broader money market rates including the effective Fed funds rate, which has been printing consistently at 8bp above the lower bound (so 4.58% currently).
- If markets currently put 100% chance of this move, for example, and a large amount of the move (eg 80% passthrough = 4bp) passes through to EFFR, then markets may actually currently be pricing less than 96% of a 25bp Funds cut (24bp in OIS and FF). Likewise if an ON RRP move is postponed to a later meeting, for example March vs January, that could impact the interpretation for implied cut pricing for early next year.
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BELGIUM: De Wever Reappointed Formateur For 2 Weeks In Effort To 'Break Impasse'
Bart De Wever, leader of the Flemish nationalist New Flemish Alliance (N-VA), has been reappointed by King Philippe as formateur for an additional two weeks in an effort to break the ongoing impasse in forming a governing coalition following the 9 June general election. De Wever's prior period as formateur expired on 12 November, but this has now been extended to 25 November.
- De Wever had been looking to put together a so-called 'Arizona' coalition that would include his N-VA, the centre-right Christian Democratic and Flemish (CD&V), the centre-left Vooruit, the liberal Reformist Movement (MR) and the liberal Les Engages (LE). It appeared that this gov't had no chance of formation following the leader of Vooruit Conner Rousseau withdrawing from talks due to the conservative economic policies of N-VA and MR.
- Reports claim that De Wever is attempting to draw Vooruit back into the coalition, with the prospect of caretaker PM Alexander De Croo's centrist Open Vld replacing the centre-left Flemish-speaking party dismissed by De Wever as leaving too-narrow a majority for the gov't (76 seats vs 74 for the opposition).
- A recent poll from HLN/VTM News/iVox showed a majority of Flemings in favour of both the 'Arizona' coalition being formed and De Wever serving as PM. If he can bring together a majority gov't he will be the first Belgian PM from an overtly separatist Flemish party.
Chart 1. Belgian Chamber of Representatives, Seats (Changes in 2024 Election)
Source: IBZ, MNI
US: Hegseth Picks Up Key Endorsement From Senate Armed Services Chair
An endorsement from Senator Roger Wicker (R-MI), likely to be the next chair of the Senate Armed Services Committee, has cleared a major obstacle for Fox News host Pete Hegseth to be confirmed as President-elect Donald Trump's Defense Secretary.
- Wicker said, per CNN: “No, I don't have concerns. I'm delighted at the prospect of working with [Hegseth].”
- Wicker is one of the most hawkish members of the Republican defence establishment. He has called on the next administration to boost defence spending by USD$55 billion in the short-term, with a medium-term goal of hitting 5% of GDP - a Pentagon budget not seen since the height of the Cold War.
- Politico notes that Wicker's plan involves, “a short-term generational investment” to deter an increasingly cooperative Russia, China, North Korea and Iran, which he has termed an “Axis of Aggressors.”
- Hegseth's nomination came as a shock to much of the defence establishment, including many Republicans who expected a more experienced pick in line with Trump's relatively restrained executive branch nominations.
- Much of the media coverage of Hegseth's nomination has focused on his commitment to carry out a root and branch overhaul of diversity policies in the Department of Defense. More broadly, Hegseth's appointment may be a nod towards loyalty after the combative relationship Trump had with military leaders during his first term.
