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FOMC: The second rate hike of the year is widely expected from the FOMC
Wednesday, short term rates pricing in near 100% probability (MNI PINCH model:
86%). That said, any further changes in the language of the statement and the
Summary of Economic Projections (SEP) will be key in discerning forward guidance
as Federal Reserve chairman Jerome Powell speaks to the press 30 minutes after
the announcement. The Fed blackout period ends midnight June 14. Nomura
economists among the many that suspect the Fed will only raise interest on
excess reserves (IOER) by 20bp, "5bp lower than the top of the target range.
This would largely be a mechanical change reflecting the narrowing EFFR-IOER
spread but may represent a small step towards moving back to a point-estimate,
as opposed to range, policy rate framework." Barclays Joseph Abate concurs,
adding that moving IOER "does not change incentives for fed funds market
participants: banks will continue to borrow in the O/N fed funds mkt to the
extend there is an arb to be earned" and while "availability of higher yielding
alternatives will still" attract cash lenders to FF mkt. Abate also "skeptical
FF can trade > IOER" w/ banks likely to halt trading in FF before then.
MNI Chicago Bureau | +1 312-431-0089 |
MNI Chicago Bureau | +1 312-431-0089 |

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