The minutes were not as dovish as market pricing after the March meeting, or pricing going into the release of the minutes, would suggest. The FOMC believes that the weakness in 1Q growth has been largely due to transitory forces, and doesn’t need to see signs of pickup in PCE or wage inflation to bolster confidence about the inflation outlook.BofA Merrill Lynch says they continue to be positioned short in the front end as they expect growth data to rebound in coming months. There was some clarification about the exit strategy as well: the Fed formalized their base case, which is to maintain a 25bp fed funds target range with IOER on the top and the ON RRP rate on the bottom.The Fed is willing to increase the capacity of the RRP program during the initial stages of liftoff, but today’s minutes indicated that the Fed intends to shrink the facility fairly soon afterward. One way to do this would be to raise IOER above the fed funds target range, widening the IOER-RRP spread beyond 25bp. Another idea officials discussed is to sell short term Treasuries, thereby permanently draining excess reserves by accelerating the normalization of the balance sheet.This would reduce the reliance on the ON RRP facility and tighten the link between the effective fed funds rate and IOER.
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