Morning Brief – Less Fireworks; more Firefighting

Less Fireworks; more Firefighting

Last night the Fed voted to keep US interest rates between 0%-0.25%. I’m not sure about you but having only recently witnessed emergency meetings slashing the benchmark rate and pledging to buy corporate securities the meetings seem somewhat mundane! Even if not quite as unexpected, the Fed’s decision last night has implications for a whole host of market participants. The Fed is currently buying about $20bn worth of US treasuries per week and last night it built up expectations that this monetary backdrop could last even longer than the market had previously thought.

Last night’s announcement comprised of the monetary policy decision, a press conference and the latest fed forecasts. Each of these three elements has a worthwhile story to tell. Firstly, the decision itself showed that the Fed does not expect rates to rise at all until at least the end of 2022. The announcement extended expectations of a protracted recovery and pinned yields at the far end of the yield curve at record lows. The factor blamed in this decision was unemployment.

This takes us neatly into the Fed’s predictions and point two. The latest forecasts from the monetary authority show unemployment falling to 9.3% on average this year. There is an anticipated improvement to 6.5% next year but the projections fall far short of the sentiment created after Friday’s stellar non-farm payroll report. Unemployment concerns undermined some of the recent recovery in asset valuations with stocks selling off heavily in Japan, Australia, Hong Kong and China this morning. The destabilisation of sentiment has also encouraged a bid into the US Dollar this morning thanks to an increase in global demand for defensive assets.

Ahead of last night’s decision the market was debating whether the Fed might embark upon a path of explicit yield curve control. Such a move is an extraordinary monetary policy tool explicitly limiting the range that debt instruments of all durations can trade within. It would be a hyper-dovish move from the Fed and the monetary equivalent, if you like, of a severe lockdown. The press conference made clear the Fed was not embarking upon this path and the Dollar has partially recovered this morning on the back of the Fed’s decision not to discuss this policy measure.

Discussion and Analysis by Charles Porter

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