Fed Minutes: Short lived reality check; Call for Fiscal Stimulus
Fed Minutes: Short lived reality check; Call for Fiscal Stimulus
Markets like to read the meeting minutes of the Federal Reserve’s FOMC. Much if not most of the time there’s not much new in them. But sometimes even when there is not much new, they can still have an impact on the market.
If investors were looking for one negative piece of news, they found it in the minutes from the most recent meeting, July 28-29. As the stock market raced to new all-time highs on Tuesday and into Wednesday afternoon, the minutes were what some consider a reality check. Well, a short-lived reality check at best is what I would call it.
They reiterated that the Fed is going to keep rates at zero for the foreseeable future. It stands ready to use all its tools to support the economy, including buying fixed income assets. But most importantly, the minutes noted that the ongoing health crisis would “weigh heavily on economic activity, employment, and inflation in the near term” and that is “was posing considerable risks to the economic outlook over the medium term”.
This was enough to throw stocks off about 1% from their prior all-time high. Rest assured though, they made a new all-time high by Thursday afternoon. I guess the stock market is forward looking?
If there was one thing that most all fed officials agreed on, it is that more fiscal stimulus from the federal government is needed. The minutes noted that the path of the economy is “highly dependent on the course of the virus and the public sector’s response to it”. *Cough* please make something happen Congress *cough*. Starting to sound passive aggressive at this point. Isn’t it?
On the emerging topic of yield curve control (i.e explicitly targeting interest rates along the treasury term structure), the messaging in the minutes was straightforward: Forward guidance is working. Interest rates remain in their desired ranges and yield curve control will likely only come into play should forward guidance prove ineffective.
The minutes also indicated that many officials want to see the Fed frame its current asset purchases ($80B per month) as having a “role in fostering accommodative financial conditions and supporting economy recovery.” Sounds a lot like QE to me.
Funny, isn’t it? Remember when the Fed was so adamant about its balance sheet expansion being “Non-QE” last September? The Repo market fiasco was less than 1 year ago. Anyhow, while the Fed’s asset purchases to date have been “all across the maturity spectrum”, look for a shift to longer-run securities or some actual “QE – QE” this time around.
The yield on the benchmark 10-year U.S. Treasury is 0.63% down from 0.71% last week.
Next FOMC meeting is Sept. 15-16. Year-long policy review results expected at meeting.
More from the author
Articles Read 1/2
🎁 Unlock 1 extra article by joining our Community!
Stay up to date with the latest articles. You’ll even get special recommendations weekly.
Already have an account? Sign In 49268b-4339ca-87b1f2-6ed303-e4c5b7
Already have an account? Sign In 49268b-4339ca-87b1f2-6ed303-e4c5b7
