The Fed kept its main rate on hold as expected Wednesday, mostly because going any lower would mean venturing into negative territory, a journey US policymakers are reluctant to take alongside their counterparts in Europe and Japan.
The April meeting was widely expected to be a kind of “status report“. Having spent the last several weeks putting out fires, buying trillions in assets and backstopping everything that “counts”, this is a time for Jerome Powell and friends to communicate to the public how effective the committee believes the emergency steps have been.
Central banks the world over have cut rates to the lower bound, effectively exhausting conventional policy room in a frantic attempt to stay ahead of the economic fallout from the draconian lockdown measures put in place to contain the spread of the pathogen.
In the new statement, the Fed describes the economy as suffering “tremendous” hardship from the pandemic, with containment measures catalyzing “sharp declines in economic activity”.
The opening paragraph is bleak, as you’d imagine it would be. To wit:
The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. The disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses.
As you can see, the inflation outlook – a source of considerable consternation given plunging commodity prices and a stubborn dollar – is subdued.
The forward guidance still comes across as a bit nebulous. The commitment to keep rates at zero remains, but there’s not much in the way of state- or date-dependent language. The statement says only that “the Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”.
If there’s anything notable at all in the statement, it’s the Fed’s reference to the public health crisis weighing “heavily” on economic activity, employment, and inflation in the “near term”, and also posing “considerable risks to the economic outlook over the medium term”. You can take that one of two ways. You might suggest it means the Fed is palpably concerned about the fallout from recent events lasting well beyond the second quarter. If, on the other hand, you’re a glass-half-full type of person, you could interpret it to mean the long-term outlook isn’t entirely apocalyptic. But, to be honest, the Fed has no way of knowing what may or may not happen with the pandemic out a year or more.
The technical tweak to IOER that many market participants expected didn’t come to pass. That despite effective fed funds drifting lower and printing 0.04% again on Tuesday.
Markets had priced in a ~65% chance of a 5bps increase in IOER headed in. “Given how active this debate has been in recent weeks, a tweak would hardly [have] qualified as a true ‘surprise’”, Wrightson ICAP economist Lou Crandall said.
The Fed’s decision not to make the IOER adjustment today potentially means they’ll have to do it inter-meeting. That “would have the potential to be more disruptive”, Crandall wrote, in the same note.
The commitment to open-ended QE remained unchanged Wednesday. The balance sheet hit $6.57 trillion in the latest update, even as the Fed has trimmed its daily purchases at regular intervals. Most analysts expect the Fed to eventually settle on a monthly pace and many see yield curve control as inevitable, likely starting over the summer.
Some key liquidity facilities rolled out early on in the Fed’s multi-week bid to unfreeze critical markets have seen less participation in recent days, a positive development. Libor had its ninth consecutive drop on Wednesday, to the lowest since the summer of 2016.
Earlier this week, the Bank of Japan removed the limit on JGB purchases and pledged further support for corporate credit in an effort to help the Japanese economy weather a guaranteed recession.
The ECB is on deck Thursday and some see scope for the announcement of more purchases in addition to the €1.1 trillion already planned for 2020.
Full April Fed statement
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. The disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses.
The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor market conditions and is prepared to adjust its plans as appropriate.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
2 yr Treasury yield at 0.24 per cent, that’s where the 10 yr is headed for a yr from now. Any thoughts of exploding GDP are ludicrous!
We may be looking at negative GDP prints for the next three quarters at a minimum. Social distancing in some way, shape or form is here to stay for a while. Industrial production will be tepid, restaurants and Malls will only be half full at best, and corporate travel will continue to be limited…who wants to be the guy that accidentally picks up the virus, deposits it on a client who then takes it home to their family and someone dies as a result. No vaccine (and it is unlikely there will be one), no economic growth for quite some time.
What WHO has said about those with antibodies not being safe and some data that show people have gotten it twice militates against a successful vaccine. None for the cold and flu vaccine is only good for six months or less. Many other viruses with no vaccines as well.
When people see the idea that GDP may rebound by 6 percent next year, they lose context that any small per cent gains will be starting from sub zero collapse, and thus good times will only, apparently exist in highly overvalued subsidized casinos. Add to that the reality that a real vaccine is maybe 2 years away and all that’s left is a global struggle for most people. If the past is a guide, gains in the stock market seldom spill out into mainstreet!