For the first time in almost 10 years, the Fed finally increased rates in December. While the move was widely anticipated, several key implementation aspects were the subject of speculation. Overall, the Fed largely met expectations: a 25 basis point target policy range, with a floor of 0.25% via the Fed’s Reverse Repo Program (RRP) and a ceiling of 0.50% via the Interest on Excess Reserves (IOER). The unlimited capacity of the RRP was a surprise (the program had previously been capped to $500mm or less), but ensured a smooth liftoff with all rates moving up in tandem on December 17th.
What was unexpected was the turbulence in markets. Weakness in equities, strength in the dollar, tumbling commodity prices and concerns about global growth all contributed to lower yields across the curve, which added uncertainty to expectations of monetary policy. For instance, the implied probability of a 25Bps hike at the September meeting went from 100% in early January down to 10% in mid-February.