The Federal Reserve has done very little to change the course of monetary policy today. Interest rates have been held steady, with the Fed Funds range of zero to +0.25%. There have been no changes to asset purchases which are at least at the current pace to sustain smooth functioning of markets. That is not to say that markets have not reacted. Interestingly, despite the apparent lack of dovish tilt, there has been a continued dollar weakness and as yet no sign of a technical rally.
FOMC statement changes
There are very few changes to the FOMC statement that the Fed put out in June.
- Strangely they add a line about employment having picked up in recent months, just as the Weekly Jobless Claims begin to pick up again.
- They also point to financial conditions improving in recent months.
- Although they note the path of the economy depending “significantly on the course of the virus”, there is very little of anything new to gleam from this statement over the potential impact on the economy, and monetary policy.
There were no changes to the FOMC was unanimous on the decisions taken, which is no surprise.
Has the Fed made the dovish shift that has been priced in?
The market has turned significantly against the dollar in recent weeks. This has been in no small part due to the perception that the US economy is set to underperform in recovery as rising COVID-19 infection rates have forced containment measures back on several states. Yields have fallen and the dollar sold off as markets have priced for a more dovish Federal Reserve as a result.
Today, we have seen no dovish shift. Despite this, the market moves seem to be suggesting that the Fed has met expectations. Positioning suggests that there has been a move on the decision to increase in the dollar swap lines throughout the world. Also perhaps there is a reading into the line on depending “significantly…on the virus”.
Of course, Fed chair Powell could still allude to action in the September meeting, but he is playing a very straight bat so far in the press conference.
What could the Fed do in the coming meetings?
- The next dovish move could come in the September meeting. July (mid-summer) would always have been an odd meeting to do much, especially with the uncertainty over how Q3 is panning out. Better to wait until September when more can be ascertained from the impact on the rising infection rates.
- Forward guidance – Targeting economic indicators. This is one main area that the market seems to feel the Fed is moving towards. Will the Fed move towards allowing inflation to run above the 2% target?
- Increase bond purchases – There was no change today, but the Fed could increase purchases probably at the longer end of the curve.
- Yield Curve Control – this is possible, but not yet, and the forward guidance message will surely be the first
- Negative rates – highly unlikely, and will surely be seen as a last resort as FOMC speakers continue to brief against the potential for sending rates negative.
The market is reacting in a dovish bias. Yields are lower, the dollar remains under pressure, whilst equities are even ticking higher. The interesting move could play out in the days ahead, as there could still be some delayed reaction, with a dollar rebound. However, as yet the embattled dollar remains under significant strain and a technical rally remains illusive.
- Treasury yields – The 2 year yield is off around 0.5bps but is interestingly at its lowest since 8th May now. The 10 year yield has fallen by around 1.5bps, so this is a “bear flattening” move at the moment, something that is USD negative.
- EUR/USD – has moved higher by around +10 pips and is close to the $1.1800 next key resistance.
- GBP/USD – Cable has rallied by around +25 pips hit $1.3000 on this statement, a key break should there be a close above.
- USD/JPY – a decline of -20 pips continues the move below 105.00 and there is little real support until the March low of 101.20
- Gold – This is where the big reaction has been seen, as gold has rallied +$13 and is within touching distance of the recent all-time high of $1980 again.
- S&P 500 – a move of +3 ticks.