Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
The FOMC voted to maintain the Fed Funds rate at the zero lower bound.
While there were limited changes to the statement, the Committee continues to view the future path of the economy as uncertain. After releasing a new long run policy framework and updating its forward guidance for interest rates at the September meeting, the Fed made efforts to avoid surprising the market thus keeping the focus on the US election and fiscal policy.
We can break the statement into three parts:
- Economic Assessment – The updated assessment highlighted the continued recovery in the economy while continuing to recognize that the level of employment remains meaningfully below pre-COVID levels.
- Outlook – The Fed continues to view the path of the economy as highly dependent on the course of the virus and the risks to the medium term outlook as considerable.
- Policy – The Committee maintained its prior guidance that policy rates will remain at zero until the labor market has achieved full employment and PCE has reached 2% and is expected to rise modestly above 2% for some period of time. Furthermore, the FOMC has committed to maintaining more broadly accommodative monetary policy conditions until inflation averages 2% as long as longer-term inflation expectations are anchored at 2%. The Fed also remained committed to the current pace of Treasury, Agency MBS and Agency CMBS purchases in order to promote easy financial conditions and smooth market functioning. The current pace stands at USD 80 billion per month in Treasuries, USD 40 billion net purchases per month in Agency MBS and USD 1-2 per month in Agency CMBS.
Chair’s Press Conference
At the press conference, Chair Powell was asked about the future of the asset purchase program. He communicated that the current pace of purchases was appropriate but that they would be willing to adjust the purchases going forward to further promote the recovery. He indicated that the Committee did discuss potential policy options which could be used if the economy were to slow again in the absence of fiscal policy or in the presence of a rise in COVID cases that result in lockdowns. These could include an increase in QE purchases or an extension in the maturity of these purchases.
He continued to emphasize that although the economy had recovered more quickly than originally expected that the overall level of growth would remain well below pre-pandemic levels and would take a significant time to return to levels seen prior to COVID-19. He reiterated his prior comments that additional fiscal stimulus would be needed to address the many millions of people still unemployed and further promote the recovery.
Chair Powell was questioned on the extent that the Fed could assist in the funding of the government. Chair Powell responded to the question head on stating that this is not something a central bank should do or that the Fed was doing as part of its current asset purchase program.
- We expect the Fed to keep policy rates at the zero lower bound for the foreseeable future and continue their asset purchase program. With unemployment still significantly elevated versus pre-COVID levels, more action will be needed from both fiscal and monetary policy makers.
- If the outlook for the economy deteriorates materially as a result of a lack of additional fiscal support or because of worsening COVID dynamics, we expect the Fed to extend the average maturity of its Treasury purchases to promote further easing.
- We expect the 10-year U.S. Treasury yield to trade in a range of 0.5% - 1.0%.