EUROZONE ISSUANCE: EGB Supply - W/C 10 Feb (2/2)

• Balance Of Risks: The diffusion indices of participants' uncertainty assessments released with the projections showed that FOMC officials were much more concerned about inflation risks than they were in September. Even if the Statement didn’t change its assessment of the balance of risks (“roughly in balance”), we will be watching to what degree the following sentence changes from the November meeting minutes: "Almost all members agreed that the risks to achieving the Committee's employment and inflation goals were roughly in balance."
• Eye On QT: As largely expected at the meeting, the Fed adjusted the offer rate on the overnight reverse repo facility down 5bp vs other administered rates, explaining "setting this rate at the bottom of the target range for the federal funds rate is intended to support effective monetary policy implementation and the smooth functioning of short‑term funding markets.” While the minutes are likely to still show that the FOMC considers reserves to be “abundant”, we wonder whether there was a broader discussion about balance sheet policy going into the New Year as QT continues to run in the background.
• There is widespread expectation that QT will end by mid-2025: for example the NY Fed’s November survey of Primary Dealers had a median expectation of runoff ending at May, with the central range being between March and July; the Market Participants survey saw it ending in March, with the central expectation being between January and June. As such, the FOMC may have to start laying the groundwork for a smooth end to QT.

• The Trump Factor: The degree to which the impact of potential Trump administration policy shifts impacted upon participants’ more hawkish outlooks at the December meeting is not entirely clear. As Chair Powell noted in the post-meeting press conference, some participants incorporated them into their projections (NY Fed’s Williams said as much after the meeting), while others did not.
• The minutes could tell us more about this divergence in approaches, and while it is too early for the FOMC to be coming to any firm conclusions, some potentially interesting hypotheses on that front would be interesting to see: for example, are one-off tariff increases considered to be one-off step-up in prices, rather than inflationary beyond the initial impact? Are the anticipated policies seen to be a net positive or negative for economic growth?
  • For context, in the minutes to the December 2016 meeting – immediately after Trump was elected the first time – the Fed staff’s economic outlook made a “provisional assumption that fiscal policy would be more expansionary in the coming years. These effects were substantially counterbalanced by the restraint from the higher assumed paths for longer-term interest rates and the foreign exchange value of the dollar”, and as for FOMC members, “about half of the participants incorporated an assumption of more expansionary fiscal policy in their forecasts” – so the December minutes could provide an idea of how many members incorporated them this time.
• Neutral Rate Questions: The “longer-run” dot in the Dot Plot rose from 2.875% to 3.00% - the 4th consecutive quarterly rise. While this isn’t considered to be the short-run “neutral rate”, it is the clearest manifestation of Committee members’ view that rates aren’t going back to pandemic lows. Powell noted that the reason to slow down cuts is because having cut by 100bp, “we are significantly closer to neutral” though “at 4.3% and change, we believe policy is still meaningfully restrictive…we are closer to the neutral rate which is … reason to be cautious about further moves.” We would expect the latter part of that to be a key focus in the minutes – are more participants concerned that neutral is not far off, and or that policy is not as restrictive as previously thought?

The minutes to the December 2024 FOMC meeting (released at 1400ET) should provide further context for what Chair Powell dubbed a “closer call” but ultimately the “right call” to cut rates by 25bp.Our preview of the December FOMC Minutes is here: (PDF):

• Recall that the meeting brought multiple hawkish surprises, with the Committee’s inflation and rate projections increased by more than expected, a more cautious Statement, and a surprise dissent by Cleveland Fed President Hammack in favor of holding rates.
• A few things to watch:
• How Many Would-Be Holders? Dot Plot indicated not just a median projection of just 50bp of cuts in 2025 (was 100bp previously), but also that 4 FOMC members saw rates remaining unchanged at the meeting. Hammack, and three other non-voting presidents, were likely the four (auguring hawkishly, because two of the other three could well have been KC Fed Pres Schmid and St Louis’s Musalem, both of whom are voters in 2025). Noted hawk and previous dissenter Gov Bowman is not (likely) to be the 4th (given that she voted in favor of a cut), which raises the question of just how close a call it was to ease at the meeting. One of our Instant Answers questions asks whether “several or more” participants could have envisaged holding rates, even if the vast majority ultimately went along with the cut.
• Hawks Fly: As such, we’ve updated our Hawk-Dove Spectrum for the New Year. Most of the Dots have been moved in a more hawkish direction. We now regard Hammack as the FOMC’s biggest hawk, though only marginally over her colleagues Bowman, Schmid and Musalem.