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Wednesday, June 3, 2015

Is There An FOMC Data Disconnect & New DFA Stress Tests For Medium Sized Banks

Federal Reserve Governor Lael Brainard Talks About The FOMC Data Disconnect
The Fed Issued A Joint Release On Stress Test Requirements For Medium Sized Banks
A summary of noteworthy news and publications from financial regulatory and supervisory agencies on June 2, 2015.
This spring marks the end of the Federal Reserve's calendar-based forward guidance and the return to full data dependency in the setting of the federal funds rate. So it is notable that just as policy making is becoming more anchored in meeting-by-meeting assessments of the data, the data are presenting a mixed picture that lends itself to materially different readings.
These were the words of Federal Reserve Governor Lael Brainard in a speech delivered at the Center for Strategic and International Studies. This is the first speech I've seen coming out of the Fed to acknowledge the disconnect between Federal Reserve Staff Forecast data and the real data that's coming in. Fed staff believes Q1 was transitory, but the data suggests that low growth may be the norm. 

Brainard is clearly not in favor of a rate hike in June, but he hasn't ruled one out for the year and reminds the audience that "the stance of monetary policy will remain highly accommodative even after the federal funds rate moves off the effective lower bound, because the real federal funds rate will initially still be low and because of the elevated size of the Federal Reserve's balance sheet and the associated downward pressure on long-term rates." This is a point most don't appreciate -- the Federal Reserve isn't lowering the real fed funds rate, only the interest rate on excess reserves. The hope is that raising this rate will also increase the fed funds rate, but the actual fed funds rate will start off low. June 17, the date of the next FOMC "statement", should be interesting.

In other regulatory news, the Board of Governors of the Federal Reserve System issued a joint release with the FDIC on the Dodd Frank Wall Street Reform and Consumer Protection Act (DFA). The DFA states that starting in June 2015, banks, federal and state savings associations, and bank holding companies with assets between $10 billion and $50 billion must undergo stress tests "that include the annual public disclosure" of test results. Starting June 2015, medium sized banks will be required to "publicly disclose DFA stress test results on an annual basis." The press release stated that the test requirements are significantly less than they are for large banks so this should have little impact on stock prices.