The Federal Reserve kept interest rates pinned near zero on Wednesday and promised to keep them there until inflation is on track to “moderately exceed” the U.S. central bank’s 2% inflation target “for some time.”
The change in guidance is part of the Fed’s monetary policy shift announced last month that is aimed to offset years of weak inflation and allow the economy to keep adding jobs for as long as possible. STORY:
** U.S. Federal Reserve maintains key overnight interest rate in target range of zero to 0.25 percent
** Median forecast of Fed policymakers is for rates to stay near zero through 2023
** Fed sees GDP declining in 2020 less than previous forecast but growing more slowly in 2021 and 2022 than previously forecast
** Fed expects to maintain current fed funds rate until labor market has reached levels consistent with assessments of maximum employment, and inflation has risen to 2% and on track to exceed that for some time
** Fed repeats it is committed to using its full range of tools to support the U.S. economy
** Fed says it seeks to achieve maximum employment, inflation at 2% rate over the longer run
** Fed says it will aim to achieve inflation moderately above 2% for some time so it averages 2%
** Fed says will maintain Treasury and agency backed securities purchases at least at current pace to help foster accommodative financial conditions
** Fed repeats the path of the economy will continue to depend significantly on the course of the coronavirus outbreak
** Fed vote in favor of policy was 8-2
** Asked about inflation Powell says guidance from policymakers shows confidence in ability to reach 2% goal
** Powell says you would expect the pace of improvement to be fastest in the early stages of recovery
** Asked about fiscal policy response, Powell says there’s been a really positive effect but more is likely to be needed
** Asked about possibility of a delayed arrival of a vaccine, Powell says we’re learning to live with Covid and engage in economic activity
**Powell says there are areas of the economy that are going to really struggle until we have a vaccine that is in wide usage
STOCKS: U.S. stocks extended gains then the S&P 500 .SPX reversed and was last off 0.36% BONDS: The 10-year U.S. Treasury note yield US10YT=RR rose to 0.6903% and the 2-year yield US2YT=RR was little changed at 0.139%
FOREX: The dollar index =USD was up 0.09%
RICK RIEDER, CHIEF INVESTMENT OFFICER OF GLOBAL FIXED INCOME AND HEAD OF THE BLACKROCK GLOBAL ALLOCATION INVESTMENT TEAM, BLACKROCK, NEW YORK
“The FOMC today began the process of “operationalizing” the average inflation targeting framework that Chair Powell first laid out in his Jackson Hole, Wyoming, Economic Policy Conference speech: including new guidance on how long policy rates can be expected to remain near zero.
“Specifically, policy rates will remain anchored at current levels ‘until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.’
“Still, we’re skeptical about the achievability of this inflation goal at a time when the disinflationary influences of technological innovation and the demographic trend of population aging arguably hold a greater impact on the rate of inflation than central bank policy does.
“Further, we question whether the endeavor of attempting to press inflation higher is even a good thing for the many lower- to middle-income U.S. households, as it could serve as a drag on net disposable income and more to the point on quality of life. Essentially, excessive inflation is a regressive tax on spending power.”
NANCY DAVIS, CHIEF INVESTMENT OFFICER, QUADRATIC CAPITAL MANAGEMENT, GREENWICH, CONNECTICUT
“The Fed is going to be on hold for the next, call it, three years. There’s no more talk of Japan-style yield curve control and essentially, since it’s price on hold on the front end, it’s already priced in for yield curve control on the front end like Australia did.
“It’s a pretty blah announcement so far, they’re dovish as expected, no big surprises.
“The bond market is just telling you that it’s still in a risk-off mode, when the 10-year yield is compared to the recovery that we’ve seen to pre-pandemic levels for equities and credit. Those markets have both recovered whereas the rates market is still in a distressed environment with the 10-year yield so low and the curve so flat.
“They want to be dovish. They want to be super dovish. The market is priced for dovish.
“If there is a pick-up inflation or any kind of stagflation environment you just don’t have as much protection that you do owning government bonds as you did in a more normal rate environment. With the Fed being placed on hold for three years that could be a really dangerous mix.”
MICHAEL ENGLUND, CHIEF ECONOMIST, ACTION ECONOMICS, BOULDER, COLORADO
“With these (second and third quarters) it’s pretty clear that they had a very glum outlook in June that had to be replaced. So we did see a massive upward revision in the GDP numbers. Interestingly we saw an even bigger downward revision in the unemployment rate.”
“They are expecting continued declines in the unemployment rate that are pretty brisk. That sort of suggests a fairly optimistic labor market outlook.”
“Clearly the consensus is in line with what they told us aside from optimism on the unemployment rate and the inevitability of the GDP revisions.”
JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL, SALT LAKE CITY
“What is interesting is … 13 out of 17 members expect to see rates at the lower zero bound in 2023. The read here is they are pledging to keep rates anchored at or near zero for the foreseeable future which is certainly a dovish position.
“It underscores the idea that if you’re hoping to get some kind of yield in the bond market it is still many years down the road – we will see fluctuations in Treasury rates, but by and large what investors need to understand on a more medium term view is that the Fed and other central banks have their collective thumbs on the bond market – as a result, rates stay low for the time being and it helps stocks look attractive on a relative basis.”
DANIELLE DIMARTINO BOOTH, CEO AND CHIEF STRATEGIST, QUILL INTELLIGENCE, DALLAS (by email)
“While this is the last FOMC meeting before the November election, Fed policy has been about maintaining stability in the credit markets, not about helping President Trump politically. Investors should be more cognizant of this, as it is highly unlikely that Powell would condone buying stocks before Election Day even if markets do correct.”
“The Fed must thread a narrative needle. Powell has the obligation to talk up the economy and its amazing recovery while he implicitly pleads Congress to pass a massive stimulus bill the Fed in turn monetizes because it’s failing on its second mandate to maximize employment with nearly 30 million workers collecting unemployment benefits in some form. That’s quite the tricky task — to communicate that the U.S economy is strong enough to stand on its own and at the same time so weak that it needs fiscal stimulus.”
JASON PRIDE, CIO OF PRIVATE WEALTH, GLENMEDE, PHILADELPHIA (by email)
“Today’s dot plot unveiled the committee’s expectations for the fed funds rate in 2023 – an overwhelming consensus believe interest rates will need to stay at the zero lower bound through 2023, which is further affirmation of the Fed’s continued commitment to easy monetary policy.”
“The Fed’s inertia was largely expected, though investors may be anticipating within the next few months additional clarity on the Fed’s new inflation targeting framework and perhaps an adjustment to the duration profile of its balance sheet holdings.”
JUSTIN HOOGENDOORN, HEAD OF FIXED INCOME, PIPER SANDLER, CHICAGO
“The Fed’s main statement is that we’re going to let inflation drift above that 2% target, because we’ve been below that for so long. I think what we’re going to get is a changed dynamic between inflation expectations, which will move up modestly, and demand for Treasuries, which will move real rates lower.
“The other dynamic is that a weakening dollar is going to drive demand out.”
“I think the Fed would like to steepen the (yield) curve and stimulate more inflation in the long run. I think the market somewhat believes they’ll be able to.”
ERIC FREEDMAN, CHIEF INVESTMENT OFFICER, U.S. BANK WEALTH MANAGEMENT, MINNEAPOLIS
“There is more clarity especially on the duration of low rates, meaning how long the Fed intends to keep rates low. With the policy stance, it appears that we are looking at 2023 and beyond, which I would say is a confirmation of market expectations as opposed to anything new.”
“It seems like the lower-for-longer camp is satisfied by this announcement. But I do think there is an open question still for investors about how tied and how visible is Fed policy with its new stated mandate.”
LUKE TILLEY, CHIEF ECONOMIST, WILMINGTON TRUST, WILMINGTON, DELAWARE
“We got a lot more detail about the possibility of rate hikes than expected. There are two trigger conditions now: that we reach maximum employment and also that inflation rises to 2%. Both of these things have been quantitative thresholds given at different times in 2014, 2015, 2016 – they were innovations at the time – and now they’ve been brought in as official policy at the same time. It’s implied that we won’t see rate hikes until 2023. That should be bullish for risk assets right now.”
“Another thing is the optimism that is included in the GDP forecast and in the unemployment forecast. It looks like they are (at) a more optimistic point that they were with June projections….For this year, the forecast is almost half the decline from last time. The median is -3.7% growth, and in June it was -6.5%. That’s a fairly substantial change in the macro forecast. At the same time, we’re getting more dovish language, so that’s notable.”
NICK MAROUTSOS, HEAD OF GLOBAL BONDS, JANUS HENDERSON INVESTMENTS
“(The Fed statement) was as expected. (The Fed) says they’ll be on hold for at least three years, my guess is at least five if not more. The Fed tends to overpromise and underdeliver on a lot of these situations.”
“I do think a yield curve control component is coming, I just don’t think it’s going to happen yet. They probably want to save that bullet for a little bit more distress in the market.”
“Every round of QE that we get, there’s always this new round of inflation excitement. But it always tends to be pretty short lived.”
“This is probably the type of market reaction the Fed wanted. Ahead of the Q&A, stocks are basically unchanged, rates are pretty much unchanged, and that’s a pretty good outcome.”
JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON DC
“The dollar is little changed from the statement and the projections. Maybe we’ll get more of a jolt when Powell speaks.
“The Fed really underscored its dovish stance and how inflation holds the key to the policy outlook. Overall it as very dovish. But what’s keeping a floor under the dollar so far is that the Fed upgraded its economic forecast for GDP for 2020. The new projection is -3.7%. That’s not as bad as (the projection) from June.”
“The Dow is a little strong post Fed. What stocks are going to cheer is that the Fed has no plans to raise rates through 2023. Higher rates would make the dollar more appealing.”
“With the euro a little weaker the market is taking a kind of buy-the-rumor-sell-the-fact scenario. The Fed while dovish largely met market expectations.”
“Powell’s presser could have curveball questions that could elicit more of an FX reaction.”
DAVID CARTER, CHIEF INVESTMENT OFFICER, LENOX WEALTH ADVISORS, NEW YORK
“We’ve come a long way from Trump saying the Fed is “loco” for raising rates, the Fed is clearly now offering unbridled support for markets and the economy. Everybody’s trying to understand the notion of the average inflation target. It will be helpful if Powell provides more detail in his Q&A session.“
“The 8-2 vote is relevant. It’s somewhat expected that the vote was not unanimous as the current policy is so historically aggressive unprecedented. It makes sense that some members are reluctant to continue this indefinitely.”
“This is the Fed’s last meeting before the election, so it’ll be interesting to see if they cover any new ground because this is their last shot.”