A day before the US is scheduled to unveil the details behind the worst quarterly performance for the domestic economy since The Great Depression, the Fed committed to doing everything in its power to prevent the situation from getting worse.
As we’ve seen over the last five months, the scope of the institution’s authority is amenable to broad interpretation during an acute crisis. Necessity breeds invention. Desperate times call for desperate measures. Fill in the blank with any applicable old adage or worn-out cliché.
The Fed is committed to “using its full range of tools to support the US economy in this challenging time”, the largely boilerplate July FOMC statement reads.
Since the June meeting, COVID-19 flare-ups in the Sun Belt have derailed the re-opening push. In fact, states representing some two-thirds of the US population have either rolled back or paused their re-opening plans.
One risk for the Fed and Jerome Powell on Wednesday was coming across as too negative, akin to the message from the June meeting and press conference.
“Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year”, the Fed said Wednesday. “The path of the economy will depend significantly on the course of the virus [which] poses considerable risks to the economic outlook over the medium term”.
“We note the potential for an increase in risk aversion in response to the Fed is relatively lower today than it was in June when there was hope for additional accommodation, including potentially the implementation of yield curve control”, BMO said, headed into the decision. “No such expectation exists this time around given the impressive recovery of financial conditions/ economic data in the almost two months since the Fed last convened”.
As BMO alludes to in that brief excerpt from an afternoon note, financial assets have generally extended gains in the weeks following the June meeting. In rates, real yields have plunged into deeply negative territory while breakevens have drifted higher with risk assets.
As discussed here on too many occasions to count, that combination is generally desirable for the Fed, even as some observers worry that record low real rates telegraph a dour outlook for the economy. And that’s to say nothing of the implications for the dollar, which has fallen precipitously of late, mirroring gold’s surge to record highs.
Part of the worry is that the Fed’s forthcoming new framework for meeting its price mandate will conspire with trillions in fiscal stimulus to inadvertently trigger runaway inflation. For now, though, that seems a distant prospect. “Weaker demand and significantly lower oil prices are holding down consumer price inflation”, the July statement reads. Global inflation pressures are described as “muted”.
Markets expect “harder”, more explicit forward guidance at some point later this year, but for now, the message remains open-ended and somewhat nebulous: “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”.
At the June meeting, the committee put a floor under asset purchases, and that commitment was reiterated after the July meeting.
Tuesday’s announcement that most of the emergency facilities launched in the wake of the crisis will be extended through year-end underscores the commitment to keeping everything (and I do mean everything) carefully administered and under control.
In that regard, the Fed has certainly succeeded. In addition to stocks’ quick recovery from the bear market plunge, flows into corporate credit funds have approximated a veritable tsunami.
Perhaps more than anything else, that is a testament to the market’s faith in monetary policy.
After all, who bets on corporate debt at a time when a pandemic has reduced earnings visibility to zero and set the stage for a wave of defaults and bankruptcies? Investors who know that the benefactor with the printing press is backstopping the entire system with no intention to let it fail, that’s who.
On Wednesday, the Fed said it will extend swap lines through March 31 of next year in order to ensure the global financial system has access to a ready supply of US dollars. The foreign repo facility is likewise extended.
“The extensions of these facilities will help sustain recent improvements in global US dollar funding markets by maintaining these important liquidity backstops”, a separate statement reads.
They’ll never let you down again. Or at least not on purpose.
Full July FOMC 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. Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The path of the economy will depend significantly on the course of the virus. 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, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain 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 developments 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.
Extension of swap lines, foreign repo statement
The Federal Reserve on Wednesday announced the extensions of its temporary U.S. dollar liquidity swap lines and the temporary repurchase agreement facility for foreign and international monetary authorities (FIMA repo facility) through March 31, 2021. These facilities were established in March 2020 to ease strains in global dollar funding markets resulting from the COVID-19 shock and mitigate the effect of such strains on the supply of credit to households and businesses, both domestically and abroad. The extensions of these facilities will help sustain recent improvements in global U.S. dollar funding markets by maintaining these important liquidity backstops. In addition, the FIMA repo facility will help support the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars other than sales of securities in the open market.
The extension of the temporary swap lines applies to all nine central banks previously announced on March 19, 2020. These swap lines allow the provision of U.S. dollar liquidity in amounts up to $60 billion each for the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden). They allow the provision of U.S. dollar liquidity in amounts up to $30 billion each for the Danmarks Nationalbank (Denmark), the Norges Bank (Norway), and the Reserve Bank of New Zealand.
The FIMA repo facility was originally announced on March 31, 2020. Its extension will allow approved FIMA account holders to continue to temporarily exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions.
