Federal Reserve still all in

Gary Pzegeo, CFA
June 10, 2020

Head of Fixed Income Gary Pzegeo breaks down the latest FOMC announcement.

The Federal Reserve reiterated an accommodative message to markets following today’s FOMC meeting. The Fed expects to support the economy and flow of credit to businesses and households with near zero interest rates through 2022 and by continuing large scale asset purchases at the current pace. 

Zero interest rate policy

The Fed left overnight rates at 0.00% - 0.25%. The median projected rate of the 17 voting members is 0.125% (the mid-point of the current range) through the end of 2022. This is in line with futures pricing for Federal Funds, which currently indicates 0.09% for a December 2022 contract. Chairman Powell, falling back on his risk management approach to policy, noted that the path ahead is highly uncertain and calls for the Fed to use all of its available tools until it is confident that the economy has weathered the economic storm. To drive his point home, the Chairman noted, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”

Balance sheet operations

The Fed expects to increase its holdings of Treasuries and Agency Residential and Commercial Mortgage-Backed Securities “at least at the current pace to sustain smooth market functioning.” Today’s statement highlighted an improvement in financial conditions and Powell noted that market functioning was better, but not all the way back to where conditions stood prior to the virus.

Summary of Economic Projections (SEP)

The Fed did not publish an SEP in the midst of its emergency operations in March, so today’s is the first since December 2019. Expectations for growth in 2020 is -6.5% with a bounce of 5% projected for 2021. The Fed doesn’t see inflation or unemployment approaching long-term mandate levels over the 2+ year projection horizon, which supports the expectation for zero rate policy. The Chairman noted longer term risks of destruction to productive capacity and worker skills, but that it was too soon to change the Fed’s longer term assumptions of potential growth and the appropriate interest rate.

 

No mention was made of yield curve controls or other broad policy reforms. We may learn more about potential changes when the minutes of today’s meeting are released next month. 

Rate and currency markets saw the release as modestly dovish. The commitment to zero rates for an extended period with a floor on asset purchases is supporting interest rate markets.

View the full FOMC announcement. 

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.