Fed Lowers Interest on Excess Reserves

May 6, 2019 Chatham Financial

Prior Week Summary

The FOMC held the target range steady at the conclusion of last week’s policy meeting but cut the interest rate paid on excess reserves five basis points. The cut was largely seen as an operational adjustment and not a signal for future moves in the target range. While the decision to leave the target range unchanged was unanimous, St. Louis Federal Reserve Bank President James Bullard indicated in an interview on Friday that a rate cut may be warranted if inflation continues to run below the Federal Reserve’s 2% target saying, “[if] actual inflation doesn’t seem to be picking up then I think the level of my concern would get more intense. I am open to a rate cut to try to combat this.”

The April employment report was largely positive as the U.S. economy added 263,000 jobs, far surpassing analyst expectations. The unemployment rate dropped to 3.6%, a 49-year low, but was accompanied by a decline in the labor force participation rate, and weaker-than-expected gains in average hourly earnings.

The Look Forward

In a light week for economic data, market participants will be awaiting updated figures on wholesale inventories, the trade balance and the Consumer Price Index. U.S. and Chinese officials are scheduled to meet in Washington this week to continue trade negotiations, but the Chinese are threatening to pull out of the talks after President Trump announced on Sunday evening that his administration would increase tariffs to 25% on $200 billion of Chinese goods and levy new tariffs on an additional $325 billion.

Rates Snapshot

Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.


Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial


Fixed Income Snapshot

Source: Bloomberg Finance L.P.



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