Stocks and Treasuries got a bit of a boost from the Fed’s communications today and mostly through guidance that was provided in the press conference. The S&P500 rallied an extra 0.3% following the communications to bolster a gain of about 1¼% on the day overall as a dovish sounding Fed was generally anticipated. The US 10 year yield fell by about 3bps post-Fed but clawed back over half of that into the close. The USD ended up little changed overall.

Four points are particularly worth emphasizing.

  • Powell said in the press conference that “we have substantially, not fully restored functioning markets” through asset purchase programs. This is interesting because some would say that market functioning has been restored and then some. Regardless, Powell is saying that the FOMC is not even at the point of shifting motives to, say, emphasizing net stimulus versus repairing markets. Thus, the first goal of boosting market functioning—and with it valuations—has not yet been achieved and that was music to the S&P500’s ears.

  • Second, Powell emphasized that the FOMC is concerned that the economy may be slowing but wants to see harder evidence including about the magnitude and duration of a slowing period. That indicates they are on heightened alert for downside disappointments, but for now, he also left the door open to the possibility the economy could do just fine. Powell also sloped off a question about upside risk if a vaccine emerges and said they “hope for the best, plan for the worst.” For now, markets may have taken this as a dovish bias in favour of doing more, but the obvious trade-off to risk appetite would be if the economy really does sour.

  • Third, Powell explicitly noted that markets should not expect the Fed to cut back on facilities or policy for a "very, very long time."

  • Fourth, dollar swap lines and the repo facility were extended to the end of March (here). This is consistent with Monday’s extensions (recall here) and not especially surprising in that the Fed is just extending the time period that such backstops will be in place throughout a period of heightened uncertainty. Powell explained that while they have served their purpose by restoring markets, the Fed extended them in order to facilitate planning by other central banks so they know they are still there and for as long as needed. He made a point of noting that there is nothing going on in the market that raises any concerns to motivate extensions.

Other developments are highlighted as follows.

STATEMENT ALTERATIONS

Simply put, hardly anything changed as the statement was like a misleading trailer for the hour long movie that followed a half hour later. Please see the accompanying statement comparison.

  • The description of current conditions noted some activity improvements;

  • Nevertheless, the emphasis upon forward risks was retained and the statement spelled out a lack of confidence in forecasting future outcomes by bluntly stating that “The path of the economy will depend significantly on the course of the virus.” Thus, the Fed essentially faded the rebound evidence.

  • They continue to reference how they will “act as appropriate”

  • They retained unchanged forward guidance and unchanged purchase guidance.

  • The decision was unanimous.

FORWARD GUIDANCE—THE STATEMENT VERSUS THE PRESSER

Forward rate guidance in the statement was left unchanged as expected. It still says the target rate range will be left where it is until the FOMC “is confident that the economy has weathered recent events and is on track to achieve its maximum employment and stability goals.”

During the press conference, Powell stated “Don't look to us to cut back on facilities or policy for a very, very long time.” He also repeated his line from the June press conference when he said “we're not even thinking about thinking about raising rates." That’s consistent with the prolonged policy rate hold in the dot plot that foresees no rate hikes throughout the 2020–22 horizon. Markets have already been hit over the head with the message that rates are going nowhere for a very long period of time and it’s unclear that anything they say when they release their strategic review would tell us much more.

Nevertheless, Powell noted that while different forms of forward guidance were discussed again, the FOMC has reached no decisions on the form of potentially altered guidance. He simply repeated that whether calendar-based or condition-based guidance is chosen is “very fact specific”.

STRATEGIC REVIEW—A DAMP SQUIB

Powell’s opening statement immediately headed off questioning about how its strategic review is progressing. He noted that the FOMC resumed discussion at this meeting and discussed enhancements to longer run goals and approaches but that he would have no details to share today. Powell stated that they will wrap up deliberations in the near future. Watch the minutes to this meeting three week’s hence for further clues.

That fended off questioning about potential changes like altered forward guidance, yield curve control, altered asset purchase programs etc.

Powell stated he could not tell us about the exact timing in terms of when they would communicate their decisions. As previously noted, however, I would look to the virtual Jackson Hole style conference at the end of August with its focus upon the decade ahead for clues.

A MESSAGE TO CONGRESS

While Powell generally continued the practice of deferring the fiscal policy dialogue to Congress, he nevertheless had a thinly veiled message for them. First, he emphasized that “we are seeing the results of the earlier strong fiscal response through spending. In a broad sense it has been well spent and kept people in their homes.” He went on to note that there will be a need for more monetary policy and fiscal policy support and that “Even if the recovery continues there will still be lots of people left behind and they are going to need support to pay their bills and spend and keep their accommodations.”

Further, Powell noted that “I would not disagree with the importance of fiscal policy because it can address things we cannot, like grants that can save jobs and businesses as opposed to lending money they may not want or be able to repay.”

The message is to Washington’s hold-outs is to acknowledge that much of the improvement to date has been driven by fiscal policy that he described as rapid and large, and hence the implied reasoning is that ending it prematurely puts those gains at renewed risk.

CONCLUSION

The question now becomes how markets will take it if both the Fed and fiscal puts lie dormant over the months ahead. Fiscal talks appear to be in a mess and the Fed is dragging its feet on its strategic review and next steps. A lagged policy response to potential downside risk would likely have to rely upon the Fed’s limited additional policy tools with pretty much everything priced. At hand is perhaps the last chance for Congress to pass a meaningful stimulus bill that is larger than presently judged to be required because there may not be another chance to counter risks until the new Congress sits in January and likely some time thereafter. In my view, this insurance motive should drive a greater fiscal response.

 

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