Minutes of the Federal Open Market Committee, June 16–17, 2026

This is the first time that I've read the FOMC meeting minutes. So, to me, it coincides with the new Warsh era, along with my at times sentimental thoughts about Warsh's ideology, which marks an era of fresh thinking for the Fed. I am generally sympathetic towards Warsh's philosophy and it has even made me optimistic. Firstly, I do not know why reserves have been kept so ample, nearly 2 decades after the GFC. I remember the Bernanke Fed communicated the policy as a short-term emergency measure that the Fed would slowly trim off, but they have never really committed to it. Sure, IORB can effectively steer policy rates without having to give recourse to traditional open market operations in the (now obsolete) Federal Funds Market, and the status quo works fine, but the traditionalist within me is still biased towards a scarce reserves system, since that was the default setting for most of modern US banking history. My perhaps unscientific view is that flooding the banking system with ample reserves in peacetime leaves no room for stimulus in times of severe crisis: indeed, US monetary policy seems to mirror its fiscal policy whereby the Treasury runs deficits like a drunken sailor even in times of peace and robust economic growth. And now, if we ever want to seriously trim the Fed's balance sheet, there is already no clear way to do it, since commercial banks have already become so structurally addicted to holding massive reserves at the Fed. The Fed already cannot simply sell off assets without risking blowing up the short-term money markets. Markets have also been on a sugar rush for the past decade, and I am getting annoyed at how markets don't seem to carefully price economic data for their own worth anymore, but instead resort to a 2nd-order guessing game where nearly every piece of economic data moves markets based on how the Fed will react to it. Good economic data crashes markets because the Fed has less room to cut rates. I am also wary of the Fed put that all market participants seem to take virtually as a guarantee these days. This level of footprint of the Fed on the markets just doesn't sit well with my Friedmanian priors. I want markets to think for themselves, and not expect the Fed to coddle them. A Fed that is expected to do everything for markets, all the time, has less room to do the right thing when no one else can. An emergency lender that already lends all the time when there is no real emergency, on the other hand - I am unsure of what to think of it. I have generally been supportive of forward guidance though, and I think that a Fed that is transparent in its conviction to support markets given X conditions or with X policy, does not eventually need to put as much real firepower behind its actions, as markets adjust and calm down ahead of time. I see forward guidance as a strong deterrent whereby a security guard who just holds a massive bazooka for everyone to see, does not need to fire it. So I do not fully agree with Warsh's conviction to make the Fed a lot less transparent. But on the other hand, I still see merits in this view - a Fed that is too fully committed to a certain policy action has less room to change course according to swift, changing economic conditions. The current Fed that we know, i.e. a Fed that talks so much, also gets itself into a lot of political crossfire that could have very much been avoided. That's before even mentioning the mission creep of the Fed - why tf is the Fed, a safeguard of INFLATION and unemployment, giving a shit about diversity of climate? Get your inflation house in order first! That being said, moving on to the June minutes: This was clearly a hawkish tilt, especially compared to the past few couple of years. Markets and the media have processed this hawkishness too. That being said, reading the minutes front to back allowed me to see yet another example of media sensationalism. I read in the WSJ that reported that the Fed is hawkish on the AI buildout. But a simple CTRL+F on the minutes shows that the AI buildout is just mentioned 4 times, while 'tariff' was mentioned 7 times, and 'conflict' (referring to the Middle East conflict) mentioned 14 times! That's not to mention that the AI buildout was mentioned last in the list of factors that the staff attributed for total and core inflation being higher than their levels a year earlier. Another reminder to take the media's reporting with a grain of salt. I have my money on either 'no change' or 'hike by 25 bps' in next week's meeting, currently can't decide on which. The FOMC also voted to maintain the status quo of the ample reserves regime, something that I don't quite get. Why did Warsh himself vote to maintain ample reserves? Furthermore, the FOMC directed the Desk to roll over at auction all principal payments from the Fed's holdings of Treasury securities. Why don't you NOT roll them over and do balance sheet runoff, if you want to shrink the Fed's balance sheet? And the FOMC directed the Desk to reinvest all principal payments from their agency securities into Treasury bills. Again, why not run them off? The FOMC also directed the Desk to increase SOMA holdings of securities to maintain ample reserves that I again find puzzling with Warsh's stern philosophy. Some questions remain, i.e. topics that I need to study further: 1) The manager commented that the ownership composition of Treasury securities shifted somewhat over the past several years from relatively price-insensitive official-sector holders to more price-sensitive private investors. I did not know this trend so I must follow up on it. Why drove this trend? Who were the former official-sector holders, and who are the current private investors? The manager then noted that this could have implications for the term premium component of yields. What implications? I presume that 'more price-sensitive' private investors means that they will dump their holdings the moment yields change or if they sniff a rate hike? If so, investors may demand a higher term premium, I think. 2) A few observations on repo rates: Repo rates dropped to 15 bps below the interest rate on reserve balances in mid-May. Well, I did NOT know that IORB does NOT serve as a floor for repo rates! Consistent with that drop, the effective federal funds rate declined 2 bps I did not know that the eFFR has some sort of relationship with repo rates There was modest take-up of the Fed's overnight reverse repo operations on days when repo rates were especially low, ... Need to study how on earth the Fed's reverse repo operations work again. Overnight reverse repo means that the Fed SELLS securities for cash, then BUYS them the next day with interest, right? So the Fed is essentially borrowing from money market institutions, and draining liquidity from the banking system in the process. I presume the interest that the Fed pays these market participants is the repo rate. If so, then when repo rates are low, money market institutions would be hesitant to LEND to the Fed, right? I presume that's why there was modest take-up of the reverse repo operations when repo rates were low. ... confirming that those operations were effective in firming the floor under money market rates I have no idea how reverse repo operations will firm the floor under money market rates, nor do I know that money market rates even have a floor (is it referring to the ZLB?). Nor do I know why a modest take-up of the reverse repo operations when repo rates were especially low, confirms this. I think it works like this. The Fed, through its reverse repo operations, can be seen as a 'borrower of last resort'. Market participants know that if they have NO ONE ELSE LEFT to lend their excess cash to, they can always turn to the Fed. So they charge a spread to non-Fed institutions when they lend their cash. The Fed's repo rate is the floor rate for lending securities. We can call the 'rate for lending securities' a 'money market rate'. It is clear to me now why reverse repo operations firm the floor under money market rates, I'm just unsure why a 'modest take-up' of those operations 'confirm' that they were effective in firming the floor. 3) Some observations/ questions on how taxes affect the amount of reserves in the banking system: Reserves increased following the seasonal low around the April tax date as the TGA dropped OK ... but I thought people pay taxes TO the Treasury? Which I assume goes directly into TGA? So why would TGA DROP on the April tax date? WAIT Bruh. I think the causal mechanism is just this - people pay taxes into the TGA yes, which sucks reserves into TGA. So reserves have a seasonal low on the April tax date. After the tax date, reserves will naturally rise again. (Need to read Joseph Wang's 'What determines the level of bank reserves?') 4) Total consumer price inflation - measured by the 12-month change in the price index for PCE - was 3.8% in April. Core PCE price inflation ... was 3.3%. Wait BRUH I did NOT know that core PCE price inflation was 3.3% a single MONTH! My returns on the S&P 500 are nowhere even near 3.3% a month, let alone my salary! So I'm losing purchasing power like mad every month, and why is the Fed so chill about that? Isn't the Fed in shambles in terms of their price stability mandate?