The March 15 FOMC announcement was likely timed to get ahead of market openings on Monday. The content had policymakers firing on all cylinders with short-term rates aggressively cut to the effective lower bound, providing forward guidance for the first time since September 2018, and instructions to the New York Fed designed to inject massive amounts of liquidity into Treasury and Agency MBS markets. A couple of other major central banks cut rates on Sunday in a coordinated action. The FOMC also announced that it would “enhance the provision of liquidity via the standing US dollar liquidity swap lines by lowering pricing to the OIS rate plus 25 basis points. Chair Powell’s phone-in press briefing at 18:00 ET provided some more information.
The things that stood out for me are:
The intermeeting announcement on Sunday evening upended expectations for the week, but it also ended a lot of uncertainty about what the FOMC might decide to do. Uncertainty is part of what has been feeding market volatility, and ending it insofar as is possible should have a good effect.
Policymakers are trying to balance the big unknowns about what is happening in the US and global economies during the pandemic and what will happen in the coming weeks with what they can do to get markets and the economy through with the least amount of damage. Powell noted the FOMC had decided to move “quite vigorously, quite aggressively” in order to protect the expansion.
The Sunday FOMC meeting was “in lieu of” the Tuesday/Wednesday deliberations which means scratch the Wednesday 14:00 ET meeting statement and release of the Summary of Economic Projections (SEP) off the calendar, as well as another press briefing by the Chair. Powell also indicated that putting together the SEP is not a useful exercise at present, so don’t look for one until the next scheduled release at the June 18-19 meeting. Powell did indicate that the second quarter is expected to be a weak one, but it is not possible to make an accurate estimate at present.
Since the meeting is over and there won’t be another, the communications blackout period should be done at midnight on Monday. Fed policymakers will be free to offer public comment after that.
Powell said the FOMC is prepared to use its full range of tools. One of those won’t be negative rates. He sees plenty of scope for the use of forward guidance and asset purchases, or some combination of the two. Powell reminded a questioner that the Fed does not have the legal authority to buy other than Treasurys and Agency debt, so that is where asset buys will take place.
Powell said the asset buys announced March 15 are intended to provide liquidity but acknowledged these will provide accommodation. He noted the March 12 liquidity action helped, however, the FOMC felt needed to do more to ensure functioning of important markets. When asked if this was QE, Powell said, “It is of less interest to me what this is labeled” and focused on better market function and thus supporting the economy better. My takeaway is that this is what former Chair Ben Bernanke referred to as credit easing. That label never managed to stick. I am quite sure this program will be called QE4 even though its genesis is from a different sort of crisis. The US economy actually wasn’t in a downturn to start with and the financial system is fundamentally in better conditions than it was at the start of the financial crisis. The point is that at present, financial markets need some help to ensure smooth functioning. Intermediate via repo operations was not sufficiently effective, to direct buys of Treasurys and MBS was the next logical step.
The return of forward guidance is less about keeping rates low for a long, long time the way it was in previous formulations. This time around, the focus is on restoring confidence and smoothing over what is likely to be a very rough patch, but one that could be fairly brief. The statement said, “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” When asked about how quickly the FOMC was prepared to take back some or all of the accommodation, Powell reiterated that policy would be made in accordance with the dual mandate and on the best available information.
As to the price stability side of the dual mandate, Powell said, “We judge that the net effect will be to have inflation move down a little bit more”. In my interpretation, by extension this gives the FOMC more scope in lowering rates, especially if it is done to defend the strong labor market.
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