In addition to the hawkish discussion on timing of future rate hikes ("soon"), offset by the Fed's dovish admission it is willing to tolerate a "modest" inflation overshoot, coupled with the FOMC's thoughts on the shape of the yield curve, and the potential change to forward guidance, an interesting development and novel development in today's FOMC minutes was the discussion of an imminent adjustment that the Fed pays on Excess Reserves.
Currently at 1.75%, and referencing roughly $1.9 trillion in Excess Reserves, the Interest on Excess Reserves (or IOER) was prominently featured in a presentation by Simon Potter discussing the "technical realignment" of the IOER rate relative to the top of the range for the fed funds rates. This is the key excerpt:
The deputy manager then discussed the possibility of a small technical realignment of the IOER rate relative to the top of the target range for the federal funds rate. Since the target range was established in December 2008, the IOER rate has been set at the top of the target range to help keep the effective federal funds rate within the range. Lately the spread of the IOER rate over the effective federal funds rate had narrowed to only 5 basis points. A technical adjustment of the IOER rate to a level 5 basis points below the top of the target range could keep the effective federal funds rate well within the target range. This could be accomplished by implementing a 20 basis point increase in the IOER rate at a time when the Committee raised the target range for the federal funds rate by 25 basis points. Alternatively, the IOER rate could be lowered 5 basis points at a meeting in which the Committee left the target range for the federal funds rate unchanged.
In their discussion of this issue, participants generally agreed that it could become appropriate to make a small technical adjustment in the Federal Reserve’s approach to implementing monetary policy by setting the IOER rate modestly below the top of the target range for the federal funds rate. Such an adjustment would be consistent with the Committee’s statement in the Policy Normalization Principles and Plans that it would be prepared to adjust the details of the approach to policy implementation during the period of normalization in light of economic and financial developments. Many participants judged that it would be useful to make such a technical adjustment sooner rather than later. Participants generally agreed that it would be desirable to make that adjustment at a time when the FOMC decided to increase the target range for the federal funds rate; that timing would simplify FOMC communications and emphasize that the IOER rate is a helpful tool for implementing the FOMC’s policy decisions but does not, in itself, convey the stance of policy. While additional technical adjustments in the IOER rate could become necessary over time, these were not...