FOMC Meeting Recap: Powell’s Punch Bowl Party Persists
Matt Weller, CFA, CMT June 11, 2020 4:36 AM
Essentially all central bankers expect interest rates to remain at the 0% lower bound through 2022...
In our FOMC Preview report, we highlighted three major themes to watch: the central bank’s economic projections, the potential for a yield curve control (YCC) program, and any hints about reining in easing measures. To address each of those issues briefly, today’s statement and press conference offered the following answers: (temporarily?) downbeat, not officially, and not anytime soon.
As widely expected, the US central bank left its benchmark interest rate unchanged in the 0.00-0.25% range, with no changes to the interest on excess reserves (IOER) rate of 0.10% either. In a dovish development, the Fed also suggested that it will continue to buy Treasuries and MBS at “at least the current pace.” This works out to about $80B/month in Quantitative Easing (QE), or more than double the $40B/mo pace of QE3.
Turning to the central bank’s first economic projections in six months, Jerome Powell and Company clearly acknowledged the current economic difficulties while remaining stubbornly optimistic about the long run outlook:
- The median central banker expects the economy to contract -6.5% in 2020, but recover to grow by 5.0% and 3.5% in 2021 and 2022.
- Unemployment is projected at 9.3% at the end of the year, recovering to 6.5% by the end of 2021 and 5.5% by the conclusion of 2022.
- PCE inflation is expected to run at below-target rates of 0.8%, 1.6%, and 1.7% over 2020, 2021, and 2022 respectively.
- Finally, and most importantly, essentially all central bankers expect interest rates to remain at the 0% lower bound through 2022, with just two hawks (out of 16 potential voters) seeing an uptick in 2022.
In other words, even though the Fed hasn’t explicitly introduced a yield curve control program, it certainly hasn’t hinted at reining in monetary stimulus anytime soon. Chairman Powell has started his press conference as we go to press and is reiterating the accommodative message from the statement and economic projections so far.
Initial Market Reaction
So far, the global markets are reacting to the dovish-tinged announcement as expected: The US dollar is dropping by about 30 pips against its major rivals, US stock indices have bounced back to positive territory on the day, and the benchmark 10-year treasury yield is off by 1bp. Meanwhile, gold is rallying to gain nearly 1% on the day. With the Fed suggesting that its “emergency” stimulus measures and 0% interest rates are here to stay, these trends could extend further through the rest of the week.
Source: TradingView, GAIN Capital
From time to time, GAIN Capital Australia Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.