The FOMC two-day meeting did much to calm the recent risk-on market tone which has seen some equity market indexes break new highs. Markets broadly whipsawed following the conclusion of the two-day meeting; equity markets sold-off and USTs bull steepened. Meanwhile the dollar weakened, but is stronger this morning. Gold was the major beneficiary, bouncing 1.2% on the day.
As widely expected, the central bank held rates at 0%-0.25%, with no rate hikes likely through at least 2022 to curb the economic impact caused by the virus outbreak. Only two members believe there may be a case for hiking rates next in 2022, with one member forecasting as many as four hikes by the end of 2022. Fed Chair Powell opined that the central bank is “not thinking about raising rates”, adding, “We’re not even thinking about thinking about raising rates."
Having held off announcing its quarterly forecast at the previous meeting the Fed yesterday set out its outlook; for the first time this year. It expects unemployment to fall to 9.3% (from 13.3%) in the final quarter this year, GDP to contract by 6.5% in 2020, followed by an estimated 5% expansion in 2021. Benign inflationary pressure remains a concern with the median FOMC member forecast at just 1% this year, and 1.5% in 2021. Powell noted that lacklustre inflation is and has been troublesome even through the nation’s 128-month expansion ahead of the outbreak. Moreover, having noted the positive surprise to the May employment data report, Powell said: “There is just a lot of work to do in the labor market…And I think it may require Congress to help as well”, adding, “it’s a long road”.
Following the Fed’s QE infinity explosion and multitude of liquidity facilities, its balance sheet stands at an eye watering $7tn. In its latest statement the central bank said it will “increase its holdings of USTs and mortgage-backed securities (MBS) “over the coming months”. A floor was set under each, with at least USD 80bn in USTs each month and USD 40bn in MBS. Although the Fed noted that financial conditions have improved somewhat, it is still prepared to increase asset purchases “over coming months.” Also reiterating to “use its tools and act as appropriate to support the economy.”
Although the Fed admits discussing yield curve control there was no clear mention of such a strategy. However, Powell did note that the tool could be deployed to keep borrowing costs low through the extended economic recovery, adding that whether it could make a difference “is an open question”. Markets look for any further clues before the next FOMC meeting scheduled to commence on July 28.