In three emergency interventions on monetary policy in March, over the span of just three hectic week, the Federal Reserve slashed -150 basis points off the Fed Funds rate, restarted QE and ramped it up to unlimited potential. The Fed has gone at COVID-19 in a big way. However, today’s FOMC decision seems to now be one to set the scene and to try and steady the ship, rather than one that set out any further huge response. As such, the market reaction has been relatively restrained.
The statement comes with a complete overhaul. This comes as no surprise given the huge upheaval in the global economic outlook since the last scheduled FOMC statement was released back in late January.
It is a statement that is jam packed with negative language, starting in the first paragraph with the “outbreak is causing tremendous human and economic hardship across the United States and around the world”.
- On growth, there are “sharp declines in economic activity” and “considerable risks to the economic outlook over the medium term”.
- “A surge in job losses”
- It talks about “low demand and oil prices holding down consumer price inflation”.
It is interesting that the Fed mentions conditions outside the US twice (“disruptions to economic activity here and abroad”). Is this the Fed acknowledging themselves to in effect be more than just the central bank for the US?
The FOMC will “maintain the target rate until it is confident the economy has weathered recent events and is on track to achieved its maximum employment and price stability goals”. Given the deflationary impact of oil and the huge economic disruption, it is difficult to see that the Fed will begin to increase rates for a number of years now.
Importantly the Fed “will continue to purchase Treasury securities and mortgage backed securities in the amounts needed to ensure smooth market functioning”. It is important because the Fed puts no level or time horizon on this operation. It is an open-ended move. There is no exit strategy at this stage. Markets are reacting to this and the dollar is under pressure from this. It is interesting though to see that equities have not (yet) reacted positively to this bottomless well of Fed purchases.
The FOMC will “continue to offer large scale overnight and term repurchase agreement operations”. So, no technical adjustments on the reverse repos. This will help to keep swaps prices low and prevent another dollar surge on a lack of liquidity. This adds to the dollar negative bias from this statement.
Anything new on the horizon?
Nothing hinted today and not yet. This was a meeting bang in the middle of the storm, and one that comes after a huge amount of action has already been taken. This policy will continue for some time yet.
We have not heard anything on potential yield curve control. Perhaps this could become a feature of future Fed decisions, but nothing yet today.
There has been a dollar negative move, with yields higher, but interestingly equities have actually fallen. Given the enormity of the situation and the action already taken, it is not really surprising that the market has not given much of a reaction to this statement.
- US Treasury yields – 10 year yields ticking 3 basis points higher to the day high.
- EUR/USD – is around +10 pips but off earlier highs. The bulls will now be eyeing a test of the $1.0890 resistance
- GBP/USD – Cable is higher by c. +10 pips but again is paring its gains having hit
- USD/JPY – a downside break of 106.70 is retracing but remains decisive below 106.90 resistance.
- Gold – has unwound the initial push higher and is now back under the $1702 pivot line.
- S&P 500 – Wall Street has actually fallen marginally with the S&P 500 around -5 ticks lower.