Market Views from the Global Fixed Income, Currency & Commodities Team (GFICC)

In a widely anticipated move, the Federal Open Market Committee (FOMC) voted to maintain the current Federal funds target rate at a range of 0.00%–0.25%.  The Fed’s forward guidance on interest rates and asset purchases remained unchanged. The Committee continues to anticipate a substantial and sustained period of accommodative monetary policy to promote the recovery. There were no dissenters.

Committee Statement

• Economic Assessment – The updated assessment reflects the December job losses in the sectors most affected by the pandemic (e.g. leisure and hospitality), as well as the temporary moderation in activity as a result of the latest increase in COVID cases.
• Outlook – The Fed continues to view the path of the economy as highly dependent on the course of the virus and the pace of vaccinations; they still view the risks to the economic outlook as considerable.
• Current Policy and Forward Guidance –
  • 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%. 
  • On asset purchases, 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 80 billion USD (gross) in Treasuries, 40 billion USD (net) purchases per month in Agency MBS and 1-2 billion USD per month in Agency CMBS. The Fed remains flexible to adjust the purchases but will keep the program at least at the current pace until it has judged that the economy has made “substantial further progress” is made toward the Fed’s price level and employment goals.

Chair’s Press Conference

Chair Powell reiterated the bifurcated nature of the recovery as those sectors most negatively impacted by social distancing continued to struggle while other sectors such as housing had made a full recovery. Chair Powell noted that the economy is a long way from our employment and inflation goals, and it is likely to take “sometime” for substantial further progress to be achieved.

During the Q&A, Chair Powell was grilled right out of the gate about GameStop and received a handful of questions about equity markets and valuations. He responded by saying that he could not comment on any specific stocks. More broadly on addressing financial stability in the non-bank sector, he indicated that the Fed monitors these areas but cautioned he did not directly regulate them. Reporters continued to question if Chair Powell saw bubbles in asset markets. He indicated that he saw the overall financial stability risks as moderate. He believed that news about vaccines and fiscal policy were primarily driving asset prices. He focused on the fact that unemployment remains high and therefore easy monetary policy remains very appropriate. Finally, the Fed would look to macroprudential tools and regulation instead of monetary policy to address asset bubbles.

Chair Powell was asked about the progress on vaccines and the course of the virus. He believed it will take quite a while to get to herd immunity at the current pace of 1 million doses per day and it will be a struggle. In addition, he is monitoring the mutations and focused on the downside risks.  

On inflation, he indicated that they anticipate a transitory increase in inflation around the re-opening and that they will be patient to see more persistent inflation. Overall, the inflation regime is slow moving and is still one of a flat Phillips curve and low and persistent inflation dynamics.  He concluded by saying that he is more worried of falling short of a complete recovery and the damage that will do to the productive capacity of the U.S. rather than overshooting inflation.

Finally on tapering asset purchases, the Fed indicated it was too early to speak about dates and the whole focus on exiting QE was “premature”. He also indicated that he would communicate well in advance and tapering would also be gradual when it would happen.  

Our View:

• We expect the Fed to keep policy rates at the zero lower bound for the foreseeable future as well as continue their asset purchase program. With unemployment still elevated versus pre-COVID levels, additional fiscal and monetary action continue to be required, even as vaccine distribution has begun.
• If the outlook for economic activity deteriorates materially or inflation moves further away from the Fed’s target, we expect the Fed to extend the average maturity of its Treasury purchases or increase the pace of purchases to promote further easing.
• We expect the 10-year U.S. Treasury yield to trade in a range of 1.00% - 1.25% with risks to the upside as we move into the latter half of 2021.