On the January FOMC

With the coronavirus threat still emerging, and an FOMC statement that acknowledges slower spending and inflation, the Fed hiked the interest rate paid on reserves by 5 bp in an effort, in turn, to hike the effective funds rate by the same amount. Based on immediate market reaction, this was expected even though it was not in the formal consensus, and Powell seems to have assured markets that it does not indicate a hawkish turn in policy. If the hike in IOER succeeds in driving the effective funds rate higher, that will flatten the all-important yield curve between the funds rate and the 10-year Treasury. It was already not steep enough. It took the emergence of coronavirus and its impact on the oil price, but we’re beginning to see clearly why the market has been discounting all along one more rate cut this year.