Who is the Fed?

The economic reports this week were generally as expected.  Rates had been relatively flat for the month of March, but this week saw some slight improvement.  Retail Sales, Housing Starts and Permits, and several other macroeconomic reports came out this week, but the headliner was definitely the Federal Reserve (Fed) meeting that ended on Wednesday.  While it was virtually a forgone conclusion that the Fed wouldn’t be cutting rates this week, they did make some very positive changes and released an updated Summary of Economic Projects (SEP).  

Who is the Fed? Central Bank 101

The Fed is the central bank for the US.  It is supposed to be a-political and focuses on two congressionally mandated functions: price stability (low inflation) and maximum employment (low unemployment).  With these two mandates in mind, the Fed monitors the economy with economic research and regulates the banking system.  When you send a Wire Transfer from your bank, it is moving from one bank’s account to another bank’s account at the Fed.  So, US banks actually bank with the Fed.  

Fed Structure: Governors, Presidents, and FOMC

The Fed has 12 Federal Reserve Banks in various cities across the country.  Each regional bank has a President that is in charge.  The President of the United States (POTUS) appoints seven Governors to oversee the entire system.  This is called the Board of Governors.  Each Governor has a 14-year term, so they won’t be influenced by any one POTUS.  The US Senate confirms these positions.  The POTUS also appoints a Chair and Vice-Chair from the Governors for one or more four-year terms.  The Chair of the Fed, currently Jerome Powell, is one of the most influential positions in the world.  They are literally the face and spokesperson for the US economy globally.  

Even though the Chair of the Fed is very influential, they are only one of the decision makers.  The Fed Open Market Committee (FOMC) is the body that makes the decisions on US monetary policy, like cutting interest rates.  The FOMC is comprised of all seven Governors and five regional Presidents on a rotating one-year basis.  The President of the New York Fed is the only constant member that doesn’t rotate off. 

The FOMC meets eight times per year.  These meetings last two days and are closed to the press and public.  At the end of their meetings, the FOMC releases their Policy Statement. The policy statements can be read here: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

FOMC Meeting: Treasury Cap Reduced to $5B

This week we had one of the eight FOMC meetings scheduled for 2025. The most interesting part of this meeting’s statement was the FOMC’s decision to reduce the monthly redemption cap on US Treasury securities from $25 billion to $5 billion.  

During Covid, the FOMC purchased trillions of US Treasury and Mortgage-Backed Securities (MBS).  Buying this amount forces interest rates down.  They now own these securities.  

Every month some of the securities mature (end/payoff).  When that happens, the Fed needs to decide what to do with the money they receive.  Previously, they were allowing $25 billion of it to simply roll-off the balance sheet.  Now they are saying they will only allow $5 billion to do that. 

 What happens to the other $20 billion?  It gets reinvested by purchasing more US Treasuries.  This creates demand and pushes rates down.  This was very good news for the rate markets.  

Economic Projections: Signs of Slowing

Every other Fed meeting, they release their Summary of Economic Projections (SEP).  The last one we received was in December 2024.  Comparing to the previous one, we can see some interesting trends:

• Unemployment Rate: December- 4.3% | March – 4.4%
• GDP: December – 2.1% | March – 1.7%
• Core PCE: December – 2.5% | March – 2.8%
• Fed Funds Rate: Flat at 2 cuts

This shows they are clearly expecting the economy to slow.  If the economy slows faster than their expectations, that could lead them to cut rates more aggressively.  

Looking Ahead: PCE in Focus

Next week brings the Fed’s favorite inflation measure, Personal Consumption Expenditures (PCE).

Tuesday, March 25: 

• Case Shiller Home Price Index (HPI)
• FHFA HPI
• New Home Sales
• Consumer Confidence

Wednesday, March 26: 

• Durable Goods Orders

Thursday, March 27: 

• Q4 GDP (Final Reading)
• Initial Jobless Claims
• Pending Home Sales

Friday, March 28: 

• PCE

Several components that are found in PCE show up in the previously released PPI report that we discussed.  They were a bit higher than expected.  This could lead to a negative PCE report on Friday.  You should make sure your clients are protected in case the rate market doesn’t like it.