Gold prices holding its ground as Fed shows little concern for rising bond yields, inflation threat

By unanimous vote, the Committee approved a final rule that revises its Rules Regarding Availability of Information, which are the Committee's Freedom of Information Act (FOIA) rules. The revised FOIA rules, which include a range of minor and technical updates, will become effective 30 days after the forthcoming publication of the final rule in the Federal Register. Developments in Financial Markets and Open Market Operations The manager turned first to a discussion of financial market developments. In the United States, the trend toward higher longer-term yields observed in recent months accelerated over the intermeeting period, and far-forward real rates based on Treasury Inflation-Protected Securities (TIPS) rose considerably. Market participants highlighted an improving economic outlook, bolstered by passage of the American Rescue Plan (ARP) and progress on vaccinations, as underlying the increase in yields. Model- and survey-based estimates suggested that a significant portion of the increase in yields was associated with an increase in term premiums. Higher term premiums could reflect the outlook for more expansive fiscal policy and an associated upward revision in the expected path for Treasury debt outstanding. Increased uncertainty over the outlook for longer-term interest rates as well as technical factors may also have contributed to the rise in term premiums. The Treasury market functioned well over most of the period, al though measures of market liquidity deteriorated somewhat toward the end of February. Conditions gradually improved, al though some measures of market liquidity had not fully returned to earlier levels. Rates implied by interest rate futures maturing over the next several years rose notably over the intermeeting period, reportedly reflecting a reassessment by market participants of the expected path of the target range for the federal funds rate. Since the January meeting, the date of the first increase in the target range for the federal funds rate implied by a straight read of market pricing moved notably earlier to the first quarter of 2023, and the implied target rate at the end of 2023 rose around 50 basis points. However, responses to the Open Market Desk surveys suggested more modest changes to policy rate expectations. The probability-weighted mean survey expectation for the target rate at the end of 2023 rose only around 5 basis points. Expectations for economic conditions at the time of the first increase in the target range, as measured by the Desk surveys, appeared to remain broadly consistent with the Committee's policy framework and forward guidance. Expectations from the Desk surveys for the path of asset purchases were little changed. Contacts noted that these expectations have been held steady by policymaker communications emphasizing both the need to see realized progress toward the Committee's goals and the intent to communicate well in advance of the time when progress could be judged substantial enough to warrant a change in the pace of purchases. Alongside the rise in U.S. yields, broad U.S. equity price indexes increased moderately, with the largest gains in cyclically sensitive sectors. The rise in U.S. yields was also accompanied by increases in sovereign yields in other advanced economies. Some central banks responded to these yield increases with adjustments to operations; others suggested that the rising yields reflected improvements in the outlook. The deputy manager discussed the evolution of the Federal Reserve's balance sheet and related developments in money markets. Reserve balances rose more than $400 billion, on net, over the intermeeting period to $3.7 trillion, while Treasury bills outstanding decreased more than $200 billion. Against this backdrop, the effective federal funds rate softened modestly, while repurchase agreement (repo) rates declined to a greater extent. Moreover, market participants projected that reserves would grow at a historically rapid pace in coming months, reflecting continued expansion of the Federal Reserve's balance sheet along with a projected drawdown in the balances maintained in the Treasury General Account. Market contacts suggested that continued rapid expansion of reserves could put further downward pressure on money market rates. The deputy manager noted that the earliest and most pronounced pressure was likely to be observed in overnight secured financing markets, and there could be increasing usage of the overnight tweet at 2:03pm: FOMC: DESPITE A STRENGTHENING ENVIRONMENT, PARTICIPANTS CONCLUDED THAT THE UNITED STATES STOOD DISTANT FROM THE FED'S OBJECTIVES. tweet at 2:04pm: FOMC: SEVERAL PARTICIPANTS STRESSED THE VALUE OF COMMUNICATING PROGRESS LONG AHEAD OF ANY POSSIBLE QE TAPER; PACING WILL BE DETERMINED BY THE ECONOMY AND THE RATE OF PROGRESS. tweet at 2:11pm: FOMC: - Pandemic instability raises economic threats to the downside - Multiple officials are concerned that easy financial conditions are putting the country's economy in danger - Majority of participants said that they saw the threats to the outlook as broadly balanced tweet at 2:12pm: FOMC: SHOULD DOWNWARD PRESSURE ON OVERNIGHT RATES ARISE, THE FED CHAIR ACKNOWLEDGED THAT IT COULD BE REASONABLE TO CHANGE ADMINISTERED RATES AT UPCOMING MEETINGS OR EVEN WITHIN MEETINGS IF NECESSARY.