No Action From Fed – But They May Not Have The Luxury Of Inaction For Longer

FOMC Chair Powell answers reporters questions at the March 3, 2020 press conference

Monex Europe | The FOMC kept rates unchanged, extended its swap facility, and added language to its statement emphasizing that the path of the US economy depended heavily on the path of the virus.

Ultimately, the FOMC has decided not to take any policy action at all, despite the reality of the second wave of coronavirus infections in the US and an ominous dip in alternative data such as mobility and food bookings, which suggested there is “clearly a risk we are going to see a slowdown in the rate of growth”.

In a way, the Committee has the luxury of not enacting further easing because their array of liquidity and credit easing facilities, which have recently been extended, and open-ended asset purchases already mean that monetary policy is close to its maximum setting.

At this point, further monetary easing would likely require novel measures such as yield curve control or negative rates, or at a minimum some enhanced, outcome-based forward guidance. If alternative data and the threat of a second shock to the labour market from renewed restrictions are any indication, these are highly likely to be needed.

In the press conference, Powell also stated that the impact on the labour market is expected to be long by describing a “long tail where a large number of people are struggling to get back to work”.

In our view, outcome-based forward guidance is likely as early as September, when the FOMC will have a new batch of projections, as well as hard data indicating the costs of the second wave of COVID-19 infections.

FX markets are already months ahead of the FOMC and have spent the past weeks aggressively selling the US dollar. This is a reflection of the uniquely bad COVID-19 outbreak in the US and shows markets are anticipating a lower, flatter, US yield curve for longer – even if the FOMC is unwilling to confirm this will be the case just yet.