Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
As widely anticipated, the Federal Open Market Committee FOMC voted to maintain the Fed Funds target rate at 0.00%–0.25%. The tone of the statement continued to reflect the elevated level of uncertainty regarding the future path of the economy despite some recovery in the labor market in May and June as regional economies re-opened.
At the press conference, Chair Powell continued to emphasize that the Federal Reserve’s (Fed’s) quantitative easing program and low interest rate policy would remain in place as long as needed to help the economy recovery. He emphasized that the path of the economy would depend critically on the course of the virus. Chair Powell also provided an update on the Fed’s monetary policy review expected to conclude in “in the near future”.
There were no dissenters at the meeting.
In an announcement earlier in the week, the FOMC extended the use of its lending facilities through the end of 2020.
We can break the statement into two parts:
- Economic Assessment – The updated assessment highlighted the pick-up in job growth in May and June while maintaining a reference to the high level of overall unemployment.
- Outlook – The Fed is continuing to monitor the incoming information on public health, the jobs market and inflation. They are committed to maintaining easy monetary policy as long as needed to support the economy through the public health crisis and the recovery. The Fed continues to flag medium-term risks as elevated, which reaffirms the need to keep policy accommodative for a long time.
Chair’s Press Conference
At the Press Conference, Chair Powell was questioned on a variety of topics. He re-iterated that monetary policy is well placed at the current time. On a number of occasions the chair highlighted the necessity for fiscal policy to remain stimulative and accommodative to offset the ongoing shocks to the economy.
On the state of the recovery, Chair Powell cautioned that the trend in hiring and activity appeared to be slowing based on higher frequency indicators as a result of the resurgence in the virus since the Fed’s last meeting. The Chair also cited the prevalence of disinflationary pressures following the Covid-19 shock citing this as a predominant risk to the Fed achieving its dual mandate as well as unemployment remaining elevated from some period of time.
There were a few questions on the Fed’s forward guidance. Chair Powell indicated they are reviewing all options such as date based guidance and outcome based guidance. He also indicated that the year-long FOMC policy framework review would be announced and formalized in the near future.
On the Fed’s credit and liquidity facilities, Chair Powell discussed the need for the facilities to remain in place to continue to support market liquidity and serve as a backstop while the uncertainty associated with Covid-19 persisted.
- We expect the Fed to keep policy rates at the zero lower bound for the foreseeable future and continue their asset purchase program through at least the end of the year, purchasing a total of more than USD 2.5 trillion in Treasuries and USD 1 trillion in agency mortgage-backed securities. The continued fast pace of balance sheet expansion will help maintain liquidity in the Treasury market especially as supply remains elevated in order to fund fiscal aid. In addition, we expect the Fed to introduce additional forward guidance in the fall starting with an outcome-based guidance associated with inflation returning to the target sustainably. Yield curve control focused on the 3-5 year part of the curve will also remain on the table in the fourth quarter, dependent on the course of the virus.
- We expect the Fed’s purchases of Treasuries and strong forward guidance to allow U.S. yields to trade in a moderate range with less volatility than at the start of the year. We expect the 10-year Treasury yield to trade in a range of 0.5% - 1.0%.
- We anticipate that the Fed’s announced and expected lending and purchase programs will be successful in promoting market liquidity but will struggle to fully offset the shock to real economic growth even with the government aid already announced. More action will be needed from both fiscal and monetary policy makers. Solvency and defaults remains a meaningful danger to the real economy. In addition, we expect the unemployment rate to remain elevated for the foreseeable future.