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Fed Watch

Fed Watch

Call me chicken or ambition challenged, but I wouldn’t want to be in the shoes of Federal Reserve chairman Jerome Powell right about now. Sure, he has free limousine rides everywhere, bodyguards and everyone hangs on his every word. But right now Powell and his crew are facing the worst stock market bear since the Great Recession. He cannot just stand there, even if it were to be the best to let the market sort itself out. He has to do something. Given we are only days away from the next Fed Open Market Committee (FOMC) meeting (March 17-18), I think we might not see Fed action until then—unless the market continues to tank before then. As bad as things look, the Fed might want the dust to settle before loosening shock and awe. The CME’s Fed futures market, which has been historically a better predictor of Fed funds rate moves than the famous Fed “dot plots,” is effectively saying there is a very strong probability that the Fed funds rate will drop from 1.00%-1.25% to 0.25%-0.75% and strong probability it will return to zero-0.25%. That appears to be taken as a given by investors. The wildcard is Quantitative Easing, or QE. The market is buzzing with speculation that some kind of new QE program will be announced. The previous QE saw the Fed expand its balance sheet (and the U.S. money supply) enormously through its purchase of U.S. Treasury bonds in order to bring more liquidity to markets. There is even talk that the Fed would buy equities, which might or might not help the stock market. Some investors could see that as a panic move by the Fed. In the meantime, the NY Fed surprised markets last week with an announcement Thursday that it would offer up to $1.5 trillion in short-term loans to big banks, in order to “address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.” This represents an expansion of its previous program of supplying liquidity through repo operations and short-term loans in the money markets. The Wall Street Journal reported that its monthly economists’ survey expects, on average, gross domestic product to contract to 0.1% in 2Q vs a previous projection of 1.9%. They see growth of 1.2%, down from 1.9%. Annual growth was 2.3% in 2019. Separately, European Central Bank President Christine Lagarde unveiled a modest stimulus package to shield the region’s economy from the fast-spreading coronavirus, but investors weren’t impressed. She suggested the bank might cut rates further if the economic outlook worsens, but analysts were unconvinced. The eurozone economy could shrink 1.2% in 2020, as workers stay home and households cut back on travel, entertainment and large purchases, according to research firm Capital Economics. The yield on the benchmark 10-year U.S. Treasury note settled at 0.78%, new historic lows, compared to 0.78% one week ago and 1.00% the previous week ago. Unless you think U.S. bond yields are going negative, that asset class looks vulnerable to a Fed trying very hard to lift rates.

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  • Fed Watch
Aug 3, 2019

Read my lips. No more rate cuts!

On Wednesday, the Federal Open Market Committee (FOMC) cut the target for its overnight lending rate by 25 bps to a range of 2% to 2.25%. Investors widely expected this cut, but oh boy did Powell leave them wanting more. Asked if he was tamping down expectations for further rate cuts, he asserted, “Let me be clear. What I said was it’s not the beginning of a long series of rate cuts.” To his credit, this is a show of atypical transparency by our usually opaque Fed overlords who may not want markets pricing in additional easing. But, is it just us, or does this comment remind anyone of George Bush Sr.’s infamous words spoken at the 1988 Republican National Convention: “Read my lips, no new taxes!”? If this isn’t the start of a rate-cutting cycle, what is it? Well, our own Tom Lee has been writing that the US economy is in mid-cycle, not late-cycle since the start of the year and Powell agrees…”We’re thinking of it as essentially in the nature of a mid-cycle adjustment to policy.” So there it is folks, a mid-cycle adjustment to support the economy’s current expansion, and confirmation that Tom’s macro call has been right all along. Still, if in fact this economy is in mid-cycle, the question we must ask is whether such a policy action was justified, or if Trump has succeeded in bending Fed policy to his will. The stated justification (which came prior to the latest tariff announcement) was weak global growth, trade policy uncertainty, a slowdown in business investment, and inflation below the usual 2% target. Yet according to our analysis and the analysis by the Fed, the US economy is in the middle of an economic expansion. Thus, these are elements which threaten that expansion. As we wrote last week, members of the Fed have openly stated that the FOMC must now anticipate economic weakness rather than react to it. Given Trump’s announcement on Thursday that an additional 10% tariff will be hitting ~$300 billion of Chinese goods, the cut may have helped soften the market’s reaction. The problem is that this philosophical shift in the Fed’s approach to policy, if genuine, is concerning because history is rife with predictions that show that most economists, even those employed in the Marriner S. Eccles building, are notably poor forecasters. Perhaps even more concerning though is that the self-directed mandate to anticipate is also a very good mask for a politicized Fed to hide behind. Rather than admit to political influences (i.e. Trump tweets), the FOMC can now point to potential threats to the economy which require policy adjustments to mitigate. How the Fed acts in the coming months will hinge on economic events outside of their control such as trade negotiations, economies ex. US, and other central bank actions. To paraphrase George Bush Sr., it was just on Wednesday that Powell said, “Read my lips, no more rate cuts.” Well it doesn’t seem the market believes him, particularly in light of the coming tariffs in September. CME Fed futures are showing 88% probability of another cut at the next FOMC meeting in September. The 10-year Treasury note yield closed Thursday at 1.87% versus 2.08% the Thursday before. As noted above, CME Fed futures currently places 83% probability of another cut at the next FOMC meeting in September. Our Policy Analyst Tom Block disagrees, believing rate policy will remain unchanged through year-end. Upcoming: 8/17-18 – FOMC meeting.

Fed, Treasury in Rare Public Spat, Shelton Nomination Blocked

The Federal Reserve and the U.S. Treasury, which have otherwise worked congenially and effectively in response to coronavirus, showed signs of discord in public on Thursday when Treasury Secretary Steve Mnuchin issued a letter that refused to extend emergency lending programs. His letter stated that the programs had accomplished their objectives and that markets had been stabilized. On Tuesday, Fed Chairman Jerome Powell had publicly stated that he did not think it was time for any tools to be removed from the Fed's belt. Mnuchin and Powell seemingly pulled off an impressive crisis response together; however, Mnuchin has been facing pressure from some of his Republican colleagues to reign in what they perceived as government largesse. Earlier this month, Senator Pat Toomey (R-PA) worried publicly that Democrats might use the Central Bank to usurp the power of the purse that constitutionally resides with the Congress. Mnuchin requested the return of about $70 billion in funds from the Fed that would have been used as loss reserves for loans yet made. This rare imbroglio may be the result of the wider efforts to stymie an incoming Joe Biden Administration by President Donald Trump. There is some legal disagreement on whether or not the Fed needs to return the requested funds. Indeed, Mnuchin's assertion in his letter that the legislative intent was to have the programs expire on December 31st is disputed by some of the primary drafters of the legislation. Nonetheless, there is an opening for a new Treasury Secretary to extend the programs. President-Elect Biden has said he will announce his Treasury Secretary soon, and Former Fed Chair Janet Yellen and current Governor Lael Brainerd are both on the short-list. A possible item for the incoming Biden administration would be a re-design of the Main-Street Lending program, which had initial shortcomings that prevented significant uptake from banks or businesses. This, however, may be hampered if the money is returned as requested. While the programs to purchase corporate bonds, the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF), were huge successes that accomplished their intent with a fraction of the authorized capital, the Municipal Liquidity Facility (MLF) has become the center of a partisan brawl; something which the Fed dreads. Some analysts have publicly worried that any perception of the Fed taking their foot off the gas, much less the foot getting taken off the gas when the Fed is saying pedal to the medal, may not be what markets want to see. Time will tell. In other Fed news, it looks as if the nomination of Judy Shelton to the Fed was blocked in the Senate after several GOP Senators had to quarantine from exposure to the virus. While her nomination may be reintroduced, it is considered unlikely. Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 0.82% down from last week 0.90%.

Shelton Confirmation Likely, Powell Opines on Vaccine

On Thursday afternoon, Alaska Senator Lisa Murkowski announced she would support President Trump's controversial nominee for an open Fed Governor position, Judy Shelton. Christopher Waller, another but less controversial nominee, who was formerly Research Director at The Federal Reserve Bank of St. Louis, will likely be confirmed later. However, Senate majority leader Mitch McConnell has not yet moved Waller’s vote to the floor, as he has for Ms. Shelton. This all but assures her confirmation before the Senate as soon as next week. Shelton's past espousing of unorthodox views like opposing Federal deposit insurance for bank deposits, advocating a 0% inflation target, devaluing the US dollar to promote domestic industries, and denying that there was any legislative intent to make the Federal Reserve an independent agency led initially to fierce bipartisan opposition to her nomination. She had to sign a pledge not to devalue the US dollar to gain Senator Pat Toomey's support. Jay Powell made an appearance with two of his foreign counterparts, ECB Chairman Christine LaGarde and Bank of England Gov. Andrew Bailey. Powell stuck to his well-known talking points of the need for more fiscal stimulus but also said it was too early to know what effects Pfizer's recent vaccine announcement would have on the path of the US and global economy. From our standpoint, it's just too soon to assess with any confidence the implications of the news for the path of the economy, especially in the near-term, he said after mentioning that The next few months could be challenging due to the pace of rising coronavirus cases. He stated that the virus continued to be the primary risk to a continuation of the economic recovery. In other Fed news, because the US Senate hangs in the balance, so does the fate of several of the agency's coronavirus emergency lending measures; Pat Toomey (R-PA), who will become Senate Banking Chairman should the GOP keep control, favors letting the programs expire. Sherod Brown (D-OH) would almost certainly favor extending them. The Trump administration has opposed publicly the extension of the Municipal Liquidity Facility, which provides short-term loans to state and local governments that have been particularly cash-strapped since the pandemic began. For its part, the Fed would likely lobby to keep the programs in place due to the deteriorating healthcare situation. Another source of partisan consternation is the Community Reinvestment Act's fate, which Fed Governor Lael Brainerd addressed in a speech a few days ago. The reversal of recent changes to this law will likely be a key priority of an incoming Biden administration. In what was perhaps a friendly signal to the President-Elect, the yearly Financial Stability Report included a section on Climate Change as a key risk to financial stability in the future for the first time. Governor Randall Quarles also told the Senate Banking Committee that the Federal Reserve had sought membership in the Network for Greening the Financial System (NGFS). We have requested membership. I expect it will be granted, said Quarles before the committee, I suspect we could probably join before the spring. Notes from the most recent Fed Meeting indicate that the Governors discussed raising MBS purchases to $120 billion a month if the virus hampers economic momentum enough . However, for the time being asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 0.90% up from 0.82% last week.

Fed Board Warns of Virus Risks, Leaves Policy Unchanged

The Federal Open Market Committee (FOMC) concluded its meeting November 5th. Given that the United States election has yet to be fully tallied as we went to press, interest in the Fed announcement was a bit muted compared to usual. In an address to the media, Chairman Jay Powell acknowledged some impressive strength in recent economic numbers, notably in housing, but he mostly stressed the severe threat that the virus poses to the continued economic recovery. He said that the pace of economic recovery had moderated and urged Americans to take steps to protect themselves from COVID. At the FOMC meeting in September, the governors laid out a plan to give unprecedented monetary support to the economy by creating stringent criteria for raising rates. The criteria are a healthy labor market moving toward maximum employment, an annual inflation rate of at least 2%, and forecasts that inflation will (in the future) moderately run above 2%, in line with the new AIT framework. The Fed's new statement remained steadfast in its commitment to these criteria, which many believe effectively amounts to guaranteeing low-bound rates for the next three to four years, maybe even longer. The Fed noted in their statement that inflation is abnormally subdued partially due to energy prices. From CNBC, Steve Liesman asked Chairman Powell why the Fed was continuing quantitative easing despite the improvement in financial market function. Powell responded that asset purchases were not only made by the Fed solely to stabilize financial markets but also to support economic activity. Despite claims to the contrary from former Fed officials- he also mentioned that the Fed is far from out of firepower. He strategically included that a key consideration of the recent meeting was how to expand asset purchases to be even more accommodative if necessary by expanding the already huge numbers involved. In his typical reassuring tone, he said: We have a habit of keeping things in place a while. This may be a good thing. In mid-October at a virtual discussion Governor and Vice-Chair of Supervision Randall Quarles speculated that the enormous monthly purchases of Treasuries by the Fed, around $80 billion, may not be able to be sufficiently absorbed by the private sector in the event of market declines. He said it was an 'open question' whether or not the Fed's participation was indefinitely required for US treasury markets to function effectively. In other words, emergency powers taken to respond to this crisis may already be becoming a regular fixture. I guess it's better to have the Fed continue to do it for now, rather than getting an answer to that 'open question' that we don't want. However, the crisis response of today will inevitably become the burden of tomorrow's earners. Asset purchases remained at $40 billion of Mortgage Backed Securities (MBS) and $80 billion of Treasuries every month. The Fed Balance Sheet is just over $7 trillion, and the yield on the benchmark 10 year is 0.82% down from 0.87% last week.

Fed Out of Firepower? More Stimulus Needed: Economists

Last week an ex-FOMC member stole the spotlight, although likely at least partially at the behest of the current Federal Reserve Chairman Jay Powell, who seems to have kicked off an economist-run pro-stimulus messaging campaign a few weeks ago at the National Association of Business Economists (NABE).  Former New York Fed Governor William Dudley penned a provocatively and ominously titled Op-Ed in Bloomberg; The Fed Is Really Running Out of Firepower. The message to policymakers is clear.  The article's gist is that while there are still some tools that the Fed has left unused, like yield-curve control or more asset purchases, even the most extremely dovish of these is unlikely to move the needle on the economy without significant fiscal stimulus. The Fed's lending power doesn't work very effectively without complimentary spending power. As Mr. Dudley put it, Easy money encourages people to buy houses and appliances now rather than later. But when the future arrives, that activity is missing [without fiscal stimulus].  Last Wednesday, a current Fed Governor and the whispered-name for Biden's Treasury Secretary, should the ex-vice president win the upcoming elections, also echoed the clear message the nation's professional economist-class is sending to its political class; do your job now or risk serious harm to the economy. Governor Lael Brainard spoke even more unequivocally than Powell did at NABE, saying that Congress not coming through with timely fiscal support was the most significant downside risk to a robust economic recovery.  The Fed, whose current Chairman has a bi-partisan resume and, in fact, was crucial to a campaign against using the debt ceiling as a political tool, has repeatedly said  just about as loudly as it can that the economy needs a lot of stimulus and now.  Essentially, economists are telling Congress to buy the dip on debt and communicating a key fact that we have pointed out in these pages: it is likely that even given the extraordinary levels of spending in response to COVID-19 because of exceedingly low interest rates; the interest expense on US debt is likely to stay about the same or will even be lower when all is said and done. This is why economists are speaking in such uncharacteristically direct and clear terms; because not only is it not an option to deny stimulus if you want to stave off a depression, it is also a unique opportunity to do it on the cheap. In other words, the result, because of low rates, will not dramatically crowd-out private sector activity. At least that’s what the economists say. Separately, the Fed and Financial Crimes Enforcement Network (FinCEN) issued a Request For Comment on a widely considered proposal that could be a step toward recognizing virtual currency as a legitimate currency. However, this is just the first step in the process.  Asset purchases remain steady around $40 billion worth of MBS and $80 billion of Treasuries every month. The Fed balance sheet is at its all-time high of about $7.2 trillion.  Wow. The yield on the benchmark 10 year is 0.87%, up from 0.84% last week.

Beige Book Shows “Slight to Modest” Economic Growth

The Fed released its final Beige Book before the presidential election this week. Offering a qualitative look at the economy on a regional basis, the Beige Book can be worth a quick read. The most recent edition seems to affirm the thinking of many regarding the economic recovery: it has slowed.  Economic gains were described as “slight to modest” in this month’s edition. This is better than the “sharp and abrupt” contraction highlighted in the nadir of the COVID-19 pandemic. But “slight and modest” could leave something to be desired. Especially for a Fed that is not just looking to support the economic recovery but also accommodate the expansion. So, is “slight to modest” enough to warrant a policy response out of the Fed? “Not quite yet” seems the most natural answer to me. But with the stalemate over a new coronavirus relief package looking like it will eventually come to an end, we could see that change. If you were not aware of where the Fed stands on the stimulus debate, the economic adage of “more is better” does a decent job of explaining the Fed’s position. But what the Fed could eventually do to further support the expansion remains to be seen. Increases in asset purchases, yield curve control (i.e. explicitly targeting interest rates along the Treasury term structure), shifting asset purchases to the longer-end of the yield curve, or a combination of the three seem possible. One thing is for sure.  The Fed’s policy interest rate is not changing anytime soon. Rates are at their effective lower bound and absent a major change in thinking, I doubt the Fed is going negative. Hikes are equally, if not more, unlikely. Per the most recent economic projections, most FOMC participants don’t see inflation hitting the Fed’s new two percent average inflation target until 2023. And with the new policy in place of tolerating inflation above two percent to achieve an average of two percent over time, I wouldn’t be surprised if we don’t see a rate hike until 2024-2025. Wow. The Fed’s balance sheet grew to a new all-time high this week, inching above its prior June high to $7.2 trillion. Asset purchases continue to the tune of $80 billion worth of treasury and $40 billion worth of mortgage backed securities per month. They show no signs of slowing down. The yield on the benchmark 10-year U.S. Treasury is 0.83% up from 0.74% last week. Next FOMC meeting is Nov. 4-5.  No action expected.

Clarida Weighs in; Main Street Loans Still Stuck in Neutral

Believe it or not, Fed Chair Jerome Powell is not the only person at the Fed who can make headlines. This week, Vice Chair Richard Clarida had some interesting things to say. Clarida thinks it could take “another year or maybe more”, for GDP in the United States to recover to its previous 2019 peak. And given the dismal outlook that many members of the FOMC have had, my natural reaction is: Just one year? Not bad, we’ll take it. But just like every positive statement that comes out of the Fed these days, it was met with many qualifiers. And if I had to pick the most important one, it has to be Clarida’s outlook for the labor market. He thinks it will take even longer for the unemployment rate to return to a level consistent with the Fed’s maximum employment mandate. In particular, he highlighted that even over six months since the pandemic’s onset, the unemployment rate is still at 7.9 percent as of September and would be about 3 percentage points higher if labor force participation remained at February 2020 levels. Yikes. Clarida also noted that “additional support from monetary-and likely fiscal-policy” will be needed. Economist Tim Duy sees this as a hint that the Fed is gearing up for something new in the coming months. I think he is well reasoned and would not be surprised if the words “balance sheet” begin working their way back into the financial media. Regarding the Fed’s struggling Main Street Lending Program, Congressional Oversight Committee member Bharat Ramamurti had some interesting insights this week. His view on the state of the program is pretty simple: “so far it has failed”. And while this failure of this program has been swept under the rug in the midst of the election and the virus, Ramamurti points out that these midsize businesses targeted by the Main Street Lending Program account for about a third of GDP and “it’s a real problem that we are failing to provide them with sufficient economic relief”. And in case you were not aware, some of them are in serious need of economic relief. Earlier this week, a group of individuals from the hotel industry wrote to President Trump: “We strongly urge you to use your executive authority to direct the Treasury to encourage the Federal Reserve to amend and expand the Main Street Lending Program.” A recent survey conducted by the Fed found that more than half of participating banks said they rejected Main Street loan requests from companies that were creditworthy before the COVID-19 crisis, but too severely impacted to remain viable and hence unable to repay the loan. Looks like we have a textbook instance of adverse selection our hands here. If and how the Fed and Treasury breath some life into this program bears watching. The Fed’s asset purchases continue at $80 billion worth of treasury and $40 billion worth of mortgage backed securities per month. They show no signs of slowing down. The yield on the benchmark 10-year U.S. Treasury is 0.74% down from 0.77% last week. Next FOMC meeting is Nov. 4-5. No action expected.

Powell Weighs in on Stimulus; Risks of Overdoing it are Smaller

I guess the market no longer hangs on every word of Fed Chair Jerome Powell. On Tuesday he re-re-iterated the importance of additional fiscal stimulus and noted that he thinks the “risk of overdoing it” are smaller than underdoing it. And on Wednesday, President Trump effectively killed the fiscal stimulus bill. Well, put it into a short-lived coma may be the more appropriate way to put it. I encourage you to see what my colleague Tom Block has to say on this. See page 9. This week the Fed released the minutes from its September 15-16 meeting. And for diehard Fed watchers, as always, there were a couple of sound bites worth noting. Most FOMC forecasters were assuming that an additional pandemic-related fiscal package would be approved this year. And noted that without a package, growth could decelerate at a faster-than-expected pace in the fourth quarter. Relating to its new average-inflation-targeting regime the minutes actually refer to the program as flexible, which I would say is an understatement. Without defining what letting inflation run moderately above 2% means, the FOMC has left it up to us to interpret what the new policy will entail. And this week, Chicago Fed President Charles Evans gave us some insight mentioning that he would be “pleased if we could get inflation up to 2.5% for some time”. Maybe 2.5% is what moderately above 2% means? Yesterday, the Department of Labor announced that jobless claims came in around a seasonally adjusted 840,000 this week - another sign of what appears to be a slowing pace of economic recovery in the fall. Nevertheless, the ultimate shape of the economic recovery (“V”, “U’, “K”, “square root” etc…) remains unknown. This week, economist Tim Duy highlighted that The Bureau of labor statistics released its JOLTS report. Interestingly, layoffs and discharges appear to have reverted to their pre-crisis levels while initial jobless claims remain about 4 times higher than their pre-pandemic levels. Yet another set of data pointing towards a convoluted recovery. The Fed’s Main Street Lending Program continues to be off to a slow start. Almost four months after its launch, only $2.5 billion of the program’s total $600 billion has been extended as of this week, the prospects for a pick-up are dwindling as the design of the program continues to restrict extension of loans. The Fed’s asset purchases remain in cruise control at $120 billion worth of Treasury and mortgage backed securities per month. And while the Fed has yet to issue any forward guidance on purchases, they show no signs of slowing down. The minutes mentioned that forecasters expect the purchases to increase in 2021 and 2022. The yield on the benchmark 10-year U.S. Treasury is 0.77% up from 0.70% last week. Next FOMC meeting is Nov. 4-5. No action expected.

Fed Extends Ban on Share Buybacks for Large Banks in Q4

Even for the most avid Fed watchers, it was easy to get distracted this week. The market pushed and pulled on the prospects for an additional coronavirus relief bill. It digested the first Presidential debate and the news of President Donald Trump and First Lady Melania Trump testing positive for COVID-19. Nevertheless, the Labor Department released the September jobs report this morning and the economy added about 660,000 jobs this month. In August it added about 1.5 million jobs. In June it added about 4.8 million. And while some job growth is better than no job growth, the takeaway is that pace of the economic recovery has slowed. The unemployment rate fell from 8.4% in August to 7.9% in September. At this point, a “U” shaped economic recovery can be definitively ruled out. However, it is still too early to deem the recovery a true “V”. And the prospects for an “inverse square root” recovery, or a “V” and then morphs into a “u” could be gaining steam. We are still about 10.7 million jobs short of the pre-COVID February employment levels. And this week, Economist Ernie Tedeschi highlighted that even at September’s pace, which is not guaranteed to persist as the recovery has been slowing, it would take us about 17 months to recover to February’s pre-pandemic employment level. Nevertheless, “mixed” remains a dependable word to describe the recovery. Last week, the Census Bureau reported that new home sales hit a seasonally adjusted annual rate of 1 million; the highest level since 2006. And the Atlanta Fed is projecting GDP growth of 34.6% in the third quarter, and this estimate has been getting better and better each month; rising from as low as 10% forecasted growth in July. So, what is the Fed to do in the face of this mixed outlook? On the supervisory front, the Fed extended measures to ensure that large banks remain well capitalized into year end. During the fourth quarter, banks with more than $100 billion of total assets are banned from making share repurchases. Dividends will be capped and tied to a formula based on recent income. On the policy front, the answer remains pretty much the same: not much more than it is currently doing. With rates at the effective lower bound and strong forward guidance extended through what looks like 2023, the Fed is in “wait and see” mode for the foreseeable future. And if we do see any material action, it will be on the balance sheet. And barring any major developments, I’d expect any increases in asset purchases, regardless of their intention, to equate a drop in the ($7 trillion) bucket. The yield on the benchmark 10-year U.S. Treasury is 0.70% up from 0.65% last week. Next FOMC meeting is Nov. 4-5. No action expected.

Sound Bites from FOMC Members on What AIT Could Mean

It was a busy week for Fed Chairman Jerome Powell. On Tuesday he testified in the House Financial Services Committee. On Wednesday he testified before a House panel overseeing the U.S. response to the coronavirus pandemic. On Thursday he appeared before the Senate Banking Committee. Already having issued powerful forward guidance last week, the Fed Chair once again reiterated that direct fiscal support may be needed as the Fed has limited powers. For evidence of the Fed’s limited tools, look to the Main Street Lending program. This program, which aims to support medium sized businesses that has made a meager $2.4 billion of loans out of a potential lending pot of up to $600 billion. Powell mentioned that he could see $10Bn to $30Bn of loans through the facility by year end. The seemingly endless quest for more details on what the Fed’s new average inflation targeting regime will actually look like in practice continues. And this week some FOMC participants provided some sound bites, on what inflation “moderately” in excess of 2 percent could mean. Minneapolis Fed President Neel Kashkari wrote last week that he thinks not raising rates for roughly one year after core inflation first crosses 2 percent is consistent with the strategy of aiming for a modest overshoot. Chicago Fed President Evans stated that “2.5% inflation for some period of time is likely in the cards if we’re doing our jobs right”. Abstracting from the semantics, keeping inflation expectations anchored at 2% is the goal. And so far, forward guidance, albeit with some mixed signals sent by regional Fed Presidents, appears to be working. Should this no longer be the case, look for yield curve control (i.e. explicitly targeting interest rates across the treasury term structure) or increased asset purchases. The number of applications for unemployment benefits held steady in September at just under 900 thousand per week, about 300,000 above their highest level during the 2008-2009 financial crisis. The Fed’s purchases of Treasury and mortgage backed securities will continue at at least the current pace of $80B worth of treasury and $40B of mortgage backed securities per month. The yield on the benchmark 10-year U.S. Treasury is 0.65% down from 0.70% last week. Next FOMC meeting is Nov. 4-5. No action expected.

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