As was widely expected, the Fed held rates at 0-0.25%, and rates are expected to remain here until 2023 as per the dot plot; with only 4 out of 17 Fed officials believing rates will rise by then. Moreover, in-line with the July minutes, the central bank stated that any rate hikes would be tied into achieving “maximum employment and inflation at the rate of 2 percent over the longer run.” Ahead of the covid-induced economic slump the US witnessed its longest ever economic expansion, and even then did not achieve the previously set 2% inflation target, thus the Fed said “The Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.” We expect limited short-term inflationary pressures.
Following the reiteration of allowing inflation to run hot and with limited updates on the Fed’s bond-purchasing programme the UST curve steepened; the central bank reiterated that it will continue to buy USD 80bn Treasuries and USD 40bn mortgage-backed securities “at least at the current pace to sustain smooth market functioning.” However, some market makers were hoping for the central bank to address potential purchases at the longer-end of the curve. Meanwhile, the stock market appeared to initially enjoy the committee's comments, however, sold-off as Fed Chair Powelll appeared to stumble during the press conference when asked about future asset-purchasing guidance. In response, Powell said the current stance is “appropriate” adding that the committee is prepared to adjust as required, however, this did not appear specific enough for some market makers. Powell also made another call to lawmakers to firm up the much needed fiscal package as monetary policy alone cannot pull the US out of its recession. We look for more policy clues next Wednesday when Powell is due to testify before the House on the Fed’s response to the pandemic.
The central bank upgraded its economic growth forecast for 2020 to a -3.7% contraction, from the -6.5% growth projection in June. The Fed’s unemployment rate forecast was also more positive, with expectations shifting from 9.6% to 7.6% and core PCE estimates nudged up to 1.5%, from 1%. We expect that due to the current unprecedented challenges, these figures will no doubt change at the next review, however, clearly there are signs of a faster-than-expected rebound. But there is still a long road ahead without a full-proof vaccine available. Staying with growth forecasts, the OECD this week announced it expects the world economy to shrink by 4.5%, again improved from the previous estimate of -7.6%. The organisation estimates that US growth will fall by 3.8% while China will be the only G-20 nation to witness moderate growth.